Revised Credit Handbook

MCB Bank Limited Credit Handbook
Credit Handbook
Section 1
Introduction
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Section 1:
Introduction
1.1 Risk Management Policy Framework

1.2 Credit Handbook
1.3 Scope of the Document
1.4 Maintenance and Upgrade
1.5 Credit Handbook Rollout Plan
1.6 Monitoring Effectiveness & Implementation
1.7 MCB’s Credit Risk Initiatives
1.8 Miscellaneous
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1.1 Risk Management Framework
The following documents constitute the Risk Management Framework for the Bank
as a whole:
a) Risk Management Policy
i. Integrated Risk Management Framework
ii. Credit Policy
iii. Market Risk Policy including liquidity management
iv. Operational Risk Policy
b) Risk Appetite Statement
c) Credit Handbook
d) Operational Risk Framework
e) Market Risk Limits Policy
f) Treasury and Investment Policy
The above documents cover all the requirements of the SBP Policy Framework1, as
well as address the required policy aspects under Basel II.2 As the Bank moves on
with its implementation of Basel II the following additional policy documents are
envisaged:
a) Obligor Ratings Framework (Basel-II Credit Risk: IRB Approach compliant)
b) Key Risk Indicator Framework
The above listed documents primarily cover policy issues. However, this Handbook
and some other documents (e.g. CRC Process Flows, SLA documents, etc.) deal
only with procedural issues.
1.2 Credit Handbook
The Credit Handbook was launched in March 2008, which replaced previous Credit
Manual and eliminated policy / procedural gaps identified as a result of the gap
analysis conducted for Basel II Standardized Approach to Credit Risk. Since its
rollout, a number of changes have been made to the Handbook as a result of on-
going review of the same. This is the updated and revised version of the Credit
Handbook. Dissemination of this Handbook is mandatory across all levels in the
bank and the document should be read in the context of the overall Risk
Management Framework as described above.
Including this section, the Handbook has seven self-contained sections. The
procedural aspects contained in this Handbook can be amended by MCC. CRMD
shall, however, be authorized to issue necessary clarifications/explanations where
required.
The importance of effective risk management on a bank-wide basis is necessitated

as the bank embarks on a plan for business diversification and growth amidst
increasing competition in the banking industry. Accordingly, the purpose of this
document is to formalize the organization, authorities and processes for credit risk
management at the bank. Additionally, the document aims to:
1 Communicated via SBP BSD Circular # 3 of 2007 dated April 4, 2007

2 For the standardized approach to Credit Risk, Internal Models approach for Market Risk and Basic
Indicator Approach for Operational Risk.
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• Assist all front office personnel in Branches, Regions, Circles and Principal
Office to carry out their relevant credit related activities; and
• Provide a training guide for personnel to learn about the bank’s risk
management policies and procedures.
The primary audience of this document includes the following:
a) Individuals involved in the marketing of products that lead directly or

indirectly to credit exposures.
b) Individuals involved in approving and reviewing credit decisions.
c) Internal Audit & Risk Asset Review Functions.
d) Individuals involved in the monitoring of credit exposure and in making the
contractual documents that evidence the terms of the credit exposure taken
by the bank.
It shall be assumed that the actions of the captioned audience are in line with the
procedures and policies highlighted in this Handbook. Any unauthorised deviation
can result in disciplinary action being initiated against the concerned individual
depending upon the severity of the action concerned.
1.3 Scope of the Document
This document covers the policies and procedures relating to the credit risk
management functions covering the following items:
• Credit Risk Management Guidelines

• Credit Risk Evaluation and Review
• Documentation & Collateral Guidelines
• Credit Risk Control
• Management of Deteriorating Credits
• Facility Structures
• Lending Operations in Sri Lanka
This document will also be applicable to the bank’s Sri Lanka branches, until a
separate Credit Handbook is developed for Sri Lanka Operations, except to the
extent that the Sri Lankan regulations require practices more stringent than those
contained in the Handbook in which case former shall be used. For this purpose, a
separate section 7 has been provided in this Handbook.
1.4 Maintenance & Upgrade
The basic responsibility for maintenance and update of this document resides with
the Credit Risk Management Division (CRMD). The review and update of this
document shall be an on-going process to ensure continuous alignment of the
policies & procedures framework with the internal and external dynamics of Bank’s
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environment. Such factors may include developments, changes and trends in the
banking industry and changes in economic, competitive or regulatory environment.
CRMD shall formally initiate any modifications to this document. Proposals for
amendments can also be made by senior management officials including the Group
/ Divisional Heads. However, such propositions shall be evaluated by CRMD prior
to initiating the update process.
This document, in its entirety, shall be reviewed on a periodic basis (at least once in
two years) and updated, if required. However, it is anticipated that the next major
revision to the document shall occur when the Bank moves over to the FIRB
approach to Credit Risk.
Whenever a change of a permanent nature is made to any credit procedure the

relevant chapter of the Handbook should be updated, otherwise a new circular
shall be issued by Credit Risk Management Division (CRMD) giving reference to the
particular Chapter / Section / Subsection of the Handbook. The new circular may
be filed in the Handbook just before the relevant chapter/section in order to keep
the document comprehensive and updated. An updated version of this Handbook
shall be available on the MCB Intranet portal under Risk Management link.
1.5 Credit Handbook Rollout Plan
The Handbook shall be disseminated to a bank-wide audience following approval of

the competent authority. Given the extensive amendments/changes envisaged in
the Credit Handbook, it is expected that all concerned officers shall review and
understand the concepts and procedures and amendments made to the document
to ensure smooth implementation of the same. After implementation of the new
Handbook, any actions contravening this document will be highlighted under the
post-facto policy.
It should be noted that compliance with the Credit Handbook shall be the
responsibility of the individual units respectively, and the role of Risk Management
Group is purely to provide policy and procedural guidelines, without ensuring
compliance of the same. Subsequently, Internal Audit and Risk Assets Review
would monitor compliance with the requirements of this document.
1.6 Monitoring Effectiveness & Implementation
The Credit Handbook shall be continuously monitored with regards to

implementation status and effectiveness of the various procedures. The
implementation and effectiveness of Credit Handbook shall be measured and
monitored on the basis of the following criteria:
a) Monitoring of requests for exceptions being received by the Approval /
Review authority.
b) Problems being faced in the implementation process.
c) Comments from the stake holders regarding effectiveness of the document.
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1.7 MCB’s Credit Risk Initiatives
To conclude this section, we are giving a synopsis of the major projects being
undertaken in the credit risk area, which will potentially have an impact on some of
the procedures / policies highlighted in this document. While this list may not be
exhaustive, it is being given here, in order to make the rest of the Bank aware of
the general direction in which we are headed.
MCB’s goal as a bank is to achieve compliance with the Foundation Internal

Ratings Based Framework for Credit Risk as per Basel II. While the Bank prepares
itself for this eventual goal, the Bank has achieved compliance with the
Standardised Approach to Credit Risk (simple approach). MCB’s major initiatives
in the field of credit risk that have already impacted or will impact this document
are briefly discussed below:
a) Use of ECAIs: The Bank plans on using External Credit Assessment

Institutions (ECAI) ratings to primarily rate its Corporate-Large3 portfolio.
The following general guidelines will be used in this regard:
i. ECAI ratings will be used wherever they are publicly available.
ii. ECAI ratings shall be solicited by the Bank for those customers who in
the opinion of the management of the bank consume significant capital,
or where by getting a rating, the associated benefit to the bank will be
material.
iii. These ratings will be obtained by using the local rating agencies. The
bank will initially allocate business to a number of rating agencies, by
allocating ratings of particular portfolio slices to them. Subsequently,
the bank can differentiate between the rating agencies on the basis of
performance of their ratings, as well as on the basis of the working
relationship formed with them.
iv. The use of ratings shall continue till such time that the Bank is allowed
to use the FIRB approach to credit risk.
b) Evolution of a Risk Ratings system: This is an important area, which is
evolving in the Bank over the last few years. It is expected that both the
Approving Units and the Reviewing Units, will use this tool diligently and
carefully, making subjective assessments where ever required.
Notwithstanding, the final call for assignment of a risk rating lies with RMG.
Internal Audit can change a risk rating post-fact on justifiable grounds.
Going forward, the Bank shall be starting a special Risk Ratings project, to
further refine its present risk rating systems4.
c) Data Collection: Data availability and integrity are key issues without
which it is impossible to measure risk, and thereby achieve compliance with
Basel II. This is a challenge for the bank, and will remain so in the future,
given the archaic state of our IT infrastructure and MIS systems. In light of
3The Corporate - Large category of Corporate asset (as per Basel II definition) class would include
entities with Annual Group Sales exceeding PKR 3 Billion; while entities with Annual Group Sales of
up to PKR 3 Billion shall be categorized as Corporate - Commercial.
4 One of the key outputs of this project will be an Internal Ratings Framework document
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the issues surrounding this area, the following factors need to be

highlighted:
i. As the integrity / quantity and timeliness of our data improves our
estimates of Risk Weighted Assets (RWA) and Economic Capital will
improve.
ii. Improvement in data collection may result in revisiting certain models,
primarily risk rating models.
iii. Data collection is an activity that impacts the Bank’s compliance with
Foundation Internal Ratings Based Approach to Credit Risk. The data
is required on financials, qualitative factors such as industry, default
data and ratings migration data.
iv. In the absence of a full-functional core banking application, RMG has
retired its existing legacy software systems such as Credit Information
File (CIF), Classified Advances System (CAS) and Agriculture Credit
System (ACS) etc. Credit Risk Management Information System
(CRMIS) has been developed and deployed by retiring legacy systems.
The required data elements for effective risk management and Basel II
purposes are being provided through CRMIS.
v. Importance of data cleansing.
d) Credit Risk Control: An independent Credit Risk Control (CRC) Function is
important as it provides a key control for lending activity being handled from
the Branches. An operational CRC Division is important for proper collateral
management, and ensuring compliance with approval conditions prior to
disbursals. The bank aims to use CRC in the following manner:
i. CRC will negotiate independent Service Level Agreements with the
various business Units. While CRC will follow its own process flows5,
the functions that it will perform for the various units, will be as agreed
in the respective SLAs.
ii. Because of the absence of a bank wide core banking application, credit
risk administration will operate at three levels in the organization.
1. Where CRC does not have coverage, CRC activities will be housed in
the Marketing Unit / Branch.
2. Where CRC does cover a particular branch, but the concerned
Branch does not have active requisite credit modules of Symbols,
CRC will essentially follow manual process flows.6
3. Where the credit related modules of Symbols are active, and are
being used by CRC.
e) Risk Based Pricing: The pricing of credit is related to the quantum of credit
loss that has two major components. The first is the expected credit loss,
which is essential information for pricing and reserving purposes, the second
component is the unexpected credit loss, or worst deviation from the
expected loss at some confidence level. The pricing of loans should not only
5As defined in the CRC Procedures Handbook

6This may also be applicable in cases where a particular branch has bandwidth constraints, and
control over the credit related modules cannot be directly passed to CRC.
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cover expected losses, but also the remuneration of the economic capital set
aside to cover the unexpected loss, the risk premium. While the decision to
price loans will be with the Business, Risk Management Group can comment
on the return v/s risk equation. This capability of Risk Management in this
regard, will gradually improve as the system of risk ratings and capital
calculation improves.
f) Software: The bank shall be using different software to improve its
measurement of credit risk. The software deployed shall include:
i. Credit Risk Management Information System (CRMIS)
ii. Statistical Packages, such as SAS, MatLab etc.
iii. Regulatory Capital calculation and Portfolio Management Software.
iv. Rating calculation software.
v. Symbols
The software used above shall vary in complexity, and may evolve from being
EXCEL based to an off the shelf application.
1.8 Miscellaneous
• While the previous credit manual contained a separate section on Agricultural

Credit, the same was removed from this version as CBBG is in the process of
formulating its own Agricultural Credit Manual. All procedures related to
agricultural finance would be covered in this document. Until the time that
CBBG’s Agricultural Credit Manual is approved and implemented, the
Agricultural Credit Section of the previous credit manual will remain in force.
However, the credit approval / review authority for agricultural credit would
continue to be governed as per Chapter 3.1 in Section 3 of this document and
other circulars issued from time to time.
• Policies and procedures related to Islamic Banking are not covered in this
document as these shall be covered under the IBG Manuals. However, as a stop
gap arrangement, the procedures and policies laid down in this Handbook shall
also be applicable to Islamic Banking except facility structure. The credit
approval / review authority for Islamic Banking would continue to be governed
as per Chapter 3.1 of Section 3 of this document and relevant circulars issued
from time to time.
• Business Groups with mutual consultation shall designate an individual
“Product Manager” for each funded or non-funded facility being offered by the
Bank. The Product Manager shall be responsible for keeping records of changes
/ amendments made in the respective product, and ensuring necessary
compliance. The Product Manager shall also be responsible for elevating
amendments / waivers (if any) to the relevant approval authority.
• Internal Audit (IA) is responsible for checking compliance with the requirements
of this Handbook. Additionally, IA is also responsible for the validation of
systems / procedures mandated by the Handbook.
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• Some operational procedure aspects are covered in this document, which shall
necessarily be construed as ‘guidelines’ only. This being the purview of
Operations Group, all instructions (related to operational procedures) from the
Operations Group shall take precedence over the contents of this document.
• Program-based lending shall generally follow the guidelines of their respective
policies and manuals (if any). However, if an explicit reference to PPM lending is
made and/or where a certain credit guideline is stated to be applicable on a
bank-wide basis in Credit Policy and/or Credit Handbook, then the instructions
mentioned in these two documents shall also be followed for program-based
lending.
• Any deviation from the procedural requirements of this Handbook would require
approval from Head RMG unless a specific approval level is mentioned in the
Handbook. Head RMG shall also be authorized to delegate the approval
authority for specific exceptions to procedural requirements as deemed
appropriate.
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Credit Handbook
Section 2
Credit Risk Management

at MCB
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Section 2
Credit Risk Management at

MCB
2.1 Guiding Principles for Credit Risk

Management at MCB
2.2 One Obligor Principle and Customer
Definitions
2.3 Procedure for Target Market and Risk Asset
Acceptance Criteria
2.4 Portfolio Management and Stress Testing
2.5 Credit Risk MIS
2.6 Internal & External Credit Ratings
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2.1 Guiding Principles for Credit

Risk Management at MCB
2.1.1 Defining Risk

2.1.2 Risk Management
2.1.3 BIS Guidelines for Risk Management in
Banks
2.1.4 Lending Principles at MCB
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2.1.1 Defining Risk
Risk is defined as the potential for loss, either directly through loss of earnings or
capital or indirectly through the imposition of constraints on an organization's
ability to meet its business objectives. Such constraints pose a risk by limiting a
bank's ability to conduct its on-going business or to take advantage of
opportunities to enhance its business.
The assessment of risk exposures can range from a simple high-low matrix to a
complex statistical analysis that quantitatively estimates the probability of a loss
occurring and the probable amount of the loss. Regardless of the sophistication of
the measure, banks often distinguish between expected and unexpected losses.
Expected losses are those that the bank knows with reasonable certainty will occur
(e.g., the expected default rate of a credit card portfolio) and are typically reserved
for in some manner. Unexpected losses are those associated with unforeseen events
(e.g., sudden changes in the economic environment or government regulations);
banks rely on capital as a cushion to absorb unexpected losses.
2.1.2 Risk Management
Banks are in the business of taking risk and getting compensated for it. Risk
management is the process by which a bank identifies, measures, monitors and
controls its risk exposures to ensure that:
• Risks are understood

• Risks are within tolerances established by the Board of Directors
• Risk-taking decisions are consistent with strategic business objectives
• Risk-taking decisions are explicit and clear
• The expected return compensates for the risk taken
• Capital allocation is consistent with risk exposures and revenue expectations
• The bank's performance incentives are aligned with risk tolerances
Risk management encompasses all of the activities of the bank that affect its risk
profile. These include decisions and actions to avoid, mitigate, transfer, insure
against, put limits on or explicitly take risk. Risk management occurs "on the line"
where the risk is created, as well as in independent risk review and control
functions, at the highest levels of management, and at the Board level.
The organizational structure through which risk management activities are

conducted depends on the culture of the organization, the size and complexity of
the business operations in question, the type of risk being taken and the
materiality of possible adverse outcomes. Thus, the application of risk management
techniques differs from bank to bank. Please refer to Risk Management Policy
document for MCB’s risk management organization structure.
Overall risk management policies and tolerances should be set on a comprehensive,

organization-wide basis by the Senior Management; and reviewed with, and where
appropriate approved by, the Board. Policies and tolerances addressing risk
identification, measurement, monitoring and control should be clearly
communicated throughout the organization.
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To be effective, the risk management strategy must be consistent with the risk
tolerance of shareholders as represented by the Board and Senior Management. To
be enforceable, the risk tolerance must be communicated and embedded in the
culture of the organization, so that risk taking remains within the established
tolerances both for specific business lines and the overall business.
2.1.3 BIS Guidelines for Risk Management in Banks
The bank specific guidelines issued by Basel Committee on Banking Supervision

are structured around the following seven principles.
• A bank’s board of directors and senior management are responsible for ensuring
that the bank has appropriate credit risk assessment processes and effective
internal controls commensurate with the size, nature and complexity of its
lending operations.
• A bank should have a system in place to reliably classify loans on the basis of
credit risk.
• A bank’s policies should appropriately address validation of any internal credit

risk assessment models.
• A bank should adopt and document a sound loan loss methodology, which
addresses credit risk assessment policies, procedures and controls for assessing
credit risk, identifying problem loans and determining loan loss provisions in a
timely manner.
• A bank’s aggregate amount of individual and collectively assessed loan loss

provisions should be adequate to absorb estimated credit losses in the loan
portfolio.
• A bank’s use of experienced credit judgment and reasonable estimates are an

essential part of the recognition and measurement of loan losses.
• A bank’s credit risk assessment process for loans should provide the bank with
the necessary tools, procedures and observable data to use for assessing credit
risk, accounting for loan impairment and determining regulatory capital
requirements.
2.1.4 Lending Principles at MCB
Based on the guidelines provided by the Basel Committee (as reproduced above),
MCB has identified the following principles for the management of risk across the
bank, within all its business lines and within specific risk categories:
• Integration of risk management

• Business line accountability
• Independent risk reviews
• Contingency planning
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A brief description of each of these principles is given below.
Integration of risk management
To ensure that interactions among risks are identified, understood and managed as
appropriate, risks should not be evaluated in isolation. The analysis required to
aggregate and highlight risks across the entire organization shall be done at the
Risk Management Group.
Purpose: To ensure that risk is managed consistently across the organization, and
that the interactions of various risks and the associated impact are understood and
considered when strategic and tactical decisions are made.
Different risks interact with each other and may compound or offset each other
(e.g., the impact of operational risk on credit risk or the interrelationship of market
risk with credit risk.) Some business activities require an integrated approach from
the start (e.g., collateralized derivative trading); other activities are very specialized
and can be managed almost in isolation. The risk management process should
recognize and reflect risk interactions in all business activities as appropriate. This
requires having a structure in place to look at risk interrelationships across the
organization.
Business line accountability
Business lines should be accountable for managing the risks associated with their
activities within established tolerances, as well as for the results, both positive and
negative, of taking those risks. This accountability should exist notwithstanding the
presence of one or more support functions dedicated to risk management activities.
Purpose: To ensure that the people who make business decisions understand the
risks they are taking; incorporate that understanding into their decision making in
order to achieve acceptable risk-adjusted returns; and are held accountable for the
associated gains or losses. Those closest to the business in question are best
positioned to identify the risks in the business, provided there is adequate
independent review and control, and an incentive structure that encourages risk
identification and management responses by the line.
In organizations with staff or support personnel dedicated to risk management

activities, there may be a tendency for the business lines to assume that risk
management is someone else's job, that the line is responsible only for such goals
as sales and customer service. Because line personnel, more than anyone else,
understand and appreciate the risks of the business, such a lack of accountability
can lead to problems.
To understand the risk/return trade-off, profits and losses should be attributed to

specific risk-taking activities and evaluated in view of the risks being taken. It is
important to scrutinize profits as well as losses, because unusually high profits can
be a signal that there is a problem. Profit and loss (P/L) analysis and other
performance measures should be conducted independent of the business lines in
order to maintain the integrity of the analysis. Going forward, to make sure that
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P/L targets are consistent with risk tolerances, a risk analysis would be included in
the budget planning process.
Independent review
Risk assessments should be validated by independent review functions with

resources, authority and expertise sufficient to assess the risks, test the
effectiveness of risk management activities, and make recommendations for
remedial action.
Purpose: To ensure that those who take or accept risk on behalf of the institution are
not the only ones who measure, monitor and evaluate the risks.
While institutions may organize and structure the review function in different ways,
the key is independence. The review functions should have the authority, expertise
and corporate stature to be unimpeded in identifying and reporting their findings.
The results of their reviews should be reported to business units, Senior
Management and, where appropriate, the Board.
Contingency Planning
Risk management policies and processes to address potential crises and unusual
circumstances should be in place and tested as appropriate.
Purpose: To ensure that the organization is prepared to identify and deal with
unusual situations in a timely and effective manner.
Stress situations to which this principle applies include all risks of all types.
Examples of contingency planning activities include disaster recovery planning,
public relations damage control, litigation strategy, responding to regulatory
criticism, and unwinding positions in light of global financial crises.
Contingency plans should be reviewed regularly to ensure they encompass

reasonably probable events that could impact the company. Plans should be tested
as to the appropriateness of responses, escalation and communication channels
and the impact on other parts of the institution.
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2.2 One Obligor Principle and

Customer Definitions
2.2.1 One Obligor Principle

2.2.2 Group Definition
2.2.3 Customer Definitions/ Asset Class under
Standardized Approach
2.2.4 Exposure Aggregation under One Obligor
Principle
2.2.5 Group Exposure Control Point (GECP) and
Subsidiary Account Manager (SAM)
2.2.6 Use of CRMIS for Capital Calculation under
the Standardised Approach
2.2.7 One Customer - One ID
2.2.8 Credit Risk Management Information System
2.2.9 Assignment of Asset Classes
2.2.10 Regulatory Capital Calculation for Credit Risk
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2.2.1 One Obligor Principle
At a counterparty level, One Obligor Principle refers to the bank’s ability to identify
and aggregate all facilities of the borrower on a bank-wide basis (whether in loan
book or treasury book) irrespective of the systems in which the exposures reside or
the location from where the borrower is serviced in respect of a particular facility.
This principle will be achieved by developing a procedural framework for
counterparty exposure identification and aggregation under this section.
In relation to a counterparty group, this principle is based on the assumption that

the performance of an entity forming a part of a group of inter-related entities may
be influenced by positive or negative results of one or more parts thereof. The
ultimate purpose of one obligor principle is to determine the total exposure on a
group including all un-drawn facilities.
One obligor exposure would be used to (a) assess the credit risk of the entity /
group on a bank-wide basis; (b) provide basis of customer exposure aggregation for
capital adequacy purposes under the Standardised Approach to SBP Basel II
Framework; (c) determinate appropriate approval / review level / process for
exposure to the entity / group and; (d) help ensuring compliance with regulatory
requirements relating to per party limits as well as monitoring of internal limits
assigned to customers. The above-mentioned principle may also facilitate better
input in business planning and strategy (e.g., Top 10 Customers/ Groups etc.).
In relation to capital calculation under the Standardised Approach, this section

covers the customer identification, exposure aggregation and capital calculation
processes while aspects pertaining to external credit ratings are duly covered in
section 2.6 to this Handbook.
2.2.2 Group Definition
In order to aggregate exposure to all related entities (and ensure compliance with
one obligor principle), MCB defines Group as an inter-related set of companies and
/ or persons with a high degree of dependency due to direct or indirect interest by
the same shareholder or group of shareholders.
The definition of a group according to Prudential Regulations of the State Bank of

Pakistan (SBP) is as follows.
“Group means persons, whether natural or juridical, if one of them or his

dependent family members or its subsidiary have control or hold substantial
ownership interest over the other. For this purpose:
(a) Subsidiary will have the same meaning as defined in sub-section 3(2) of the
Companies Ordinance, 1984 i.e. a company or a body corporate shall be deemed to
be a subsidiary of another company if that other company or body corporate
directly or indirectly controls, beneficially owns or holds more than 50% of its
voting securities or otherwise has power to elect and appoint more than 50% of its
directors.
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(b) Control refers to an ownership directly or indirectly through subsidiaries, of

more than one half of voting power of an enterprise.
(c) Substantial ownership / affiliation means beneficial shareholding of more than

20% by a person and / or by his dependent family members, which will include
his/her spouse, dependent lineal ascendants and descendants and dependent
brothers and sisters. However, shareholding in or by the Government owned
entities and financial institutions will not constitute substantial ownership /
affiliation, for the purpose of these Prudential Regulations.”
In addition to the mandatory criteria provided by SBP, MCB would consider the
following general guidelines/ criteria while determining a group relationship.
However, it is reiterated that there is an element of subjective judgement involved
in arriving at grouping decisions and Business Groups are free to propose
groupings. However, Risk Management and Internal Audit & Risk Assets Review
group shall be the final decision making authority in this regard.
• Beneficial shareholding of more than 25% by a person and / or by lineal

ascendants and descendants, brothers and sisters (even though not necessarily
dependent family members).
• Control over election of a majority of directors.
• Exercise of a ‘controlling influence7’ over management or policies.
• Common proprietorship / partnership / directorship by a person, and / or by

his / her dependent family members, which will include his / her spouse,
dependent lineal ascendants and descendants and dependent brothers and
sisters.
However, ownership / directorship in or by Government owned entities and

financial institutions (where such nomination is due to extension of credit) shall
be exempted. In case of Private Sector public limited companies exemption to be
allowed by the relevant sanctioning authority in the following instances:
o Directors holds related professional / technical qualifications and who are

full time paid employees of the company and the position of the director is
held owing to their professional and technical capabilities provided such
person is not closely related (children / parent / siblings) to sponsors
/owners of a company.
7 To illustrate the point:
• A company owns less than 50% shares of another company (an affiliate) but exercises management
control. For e.g., company ABC holds 30% shares of company XYZ, but the rest of the shares are
widely held by individuals and institutions which may or may not have a proportionate
representation on the board, i.e., effective management control is with ABC.
• A company ABC, owns 20% of shares directly in company XYZ, but has majority or controlling
interests in other companies DEF and GHI, who in turn (say) own 20% and 15% shares,
respectively, in XYZ, and as such ABC has effective control over of 55% of voting stock of company
XYZ.
• In addition to the above, there can be instances where controlling influence is exercised in the
absence of direct or indirect shareholding. Such cases shall be categorized as Group exposures
through subjective evaluation.
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o Share holdings in the name of such director or in the name of his or her
close relatives as defined above does not exceed 1% / any other notional
percentage of paid-up shares of the company and no further share is
beneficially held in his or her name. A certificate from the Company
Secretary to this effect to be placed before the competent authority allowing
the waiver and kept in bank’s record.
o Any other basis, on a case to case basis.
• Common key management / persons involved in framing financial & operating

policies or running the business (e.g. same Company Secretary or Chief
Financial Officer etc.)
• Financial interdependence:
o Either counter-party has guaranteed repayment of liabilities of the other.
o Either has provided interest free and unsecured loan (other than trade
related) in excess of 10% of the equity, to the other.
o One is the holding company of another as per the section 3 (2) of Companies
Ordinance 1984 or have common holding company.
o Entities having common premises (unless exempted by RMG).
o Interdependent business – Evidenced by substantial business transactions.
• Any other basis (including material inter-company agreements) on the basis of

which two entities may be considered to be of the same group by the business
initiating units. Credit / other Group may also do so under intimation to the
Head of concerned business group with approval of Group Head Risk
Management.
2.2.3 Customer Definitions/ Asset Classes under the Standardised Approach
For capital adequacy purposes, bank’s borrowers shall be categorized into the
following Basel-II asset classes under the Standardised Approach:
• Sovereign
• Public Sector Entity (PSE)
• Bank / DFI
• Corporate
• Retail
• Residential Mortgage
• Past Due Loans
The respective definitions of these asset classes are as follows.
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Sovereign
The sovereign asset class is represented by the exposure to the central government,
provincial government or the central bank of a country. This includes domestic
sovereign entities as well as foreign sovereigns which are subject to different risk
weights.
In addition, certain PSEs may be treated as sovereigns for lower risk weights the
names of which may be separately notified by the Government, as mentioned in the
SBP Basel II Framework.
Public Sector Entity (PSE)

The PSE asset class includes exposure to an entity, which is owned or controlled by
central or provincial government or any entity categorized as PSE by SBP.
Bank / DFI
Financial institutions falling within the definition of Bank/ DFI under the local
regulations and institutions, which are declared as such by SBP.
Corporate
Corporate asset class includes exposure to any proprietorship, partnership or
limited company that is not a PSE, Bank8, DFI, or a borrower within the definition
of regulatory retail exposures (please see below). For capital adequacy purposes,
the term also includes insurance companies and securities firms. Under
Standardized Approach (as per SBP Basel II Framework), SMEs not fulfilling the
conditions of the regulatory retail portfolio would also be considered as Corporate.
For the purposes of ascertaining the appropriate level of Credit Approval / Review
Authority and the relevant credit approval process / formats, the Corporate asset
class shall be sub-divided into two categories, i.e. Corporate - Large and Corporate
- Commercial. The Corporate - Large category of Corporate asset class would
include entities with Annual Group Sales exceeding PKR 3 Billion; while entities
with Annual Group Sales of up to PKR 3 Billion shall be categorized as Corporate -
Commercial.
Retail
The exposure to an individual person or persons or to a small business; and is in
the form of revolving credits and lines of credit (including credit cards and
overdrafts), personal term loans and leases (e.g. instalment loans, auto loans and
leases, student and educational loans, personal finance) and small business
facilities and commitments. Mortgage loans are not included in this category. To be
eligible the total exposure to a single person;
- Should not be more than Rs. 75 million in case of both consumer loans
and small business loans;
- Should not be more than 0.2% of total (gross) retail portfolio of the
bank/DFI.
8 This would also include MDBs not eligible for 0% Risk Weight according to SBP guidelines.
21
Past due retail loans are to be excluded from the overall regulatory retail portfolio
when assessing the granularity criterion of 0.2% specified herein, for risk-weighting
purposes. Moreover, all public limited companies incorporated under Companies
Ordinance, 1984 or any other statute will not be treated under Retail, regardless of
their exposure.
Residential Mortgage
Loans fully secured against residential real estate. It includes loans provided to
individuals for the purchase of residential house / apartment. The loans availed for
the purpose of making improvements in house / apartment / land shall also fall
under this category. Loans secured by residential real estate for business purposes
and loans secured against commercial real estate do not fall under mortgage loans.
Past Due Loans

In addition to above-mentioned specific asset classes, past due loans are treated as
separate asset classes and subject to distinct risk weights as mentioned in the SBP
Basel II Framework. An exposure shall be considered past due in whole if mark-
up/ interest on it or principal is overdue as per Prudential Regulations as amended
from time to time.
2.2.4 Exposure Aggregation under One Obligor Principle
Regulatory capital calculation under the Standardised Approach to credit risk

requires the bank to aggregate all exposures and assign asset classes subject to
distinct risk weights. For certain asset classes (i.e. Bank, Corporate etc.), risk
weights shall be subject to the external ratings assigned by recognised External
Credit Assessment Institutions (refer to section 2.6 of this Handbook) while other
asset classes will be subjected to fixed risk weights (such as retail and residential
mortgage) as prescribed under the SBP Basel II Framework.
In the above respects, the bank will ensure that:
All the required data fields/ functionalities are available in the various
systems
Adequate interfaces/ mapping are created amongst various systems at the

bank to facilitate exposure aggregation
Mechanism is developed and implemented for maintaining data integrity and

quality on an on-going basis
Exposures are correctly assigned to their respective Basel II asset classes

under the Standardised Approach.
2.2.5 Group Exposure Control Point (GECP) and Subsidiary Account Manager
(SAM)
Whenever the bank deals with a customer and its related entities (Group as defined
above) at more than one location, or when the customer deals with different
22
business units within the bank it is important to designate a unit to take on

primary responsibility for managing the relationship. This function is critical for
having all possible marketing and credit synergies. The designation of a unit would
also ensure accountability for credit process on an overall Group basis.
Group Exposure Control Point (GECP)

GECP RMs will be the single point of origination for all credit requests of the entire
customer group. They will be responsible for evaluating the strength of the Group
and ensure that all the risks are adequately covered in the group relationship.
They will monitor and manage exposure limits assigned to the customer group and
they will also be responsible for ensuring that all corporate developments,
especially changes in the shareholding pattern that result in any change in group
relationships are duly communicated to Credit Risk Reporting & Systems
Department (CRRS) for necessary updating (according to both MCB and SBP
criteria).
Subsidiary Account Manager (SAM)

SAMs will be responsible for counter-parties within the customer grouping. All
SAMs within the customer grouping shall have dotted reporting lines to the GECP
in relation to account management and exposure monitoring.
Prior to new credit applications, SAMs shall check with the GECP In-charge on
availability of limits. In addition, all account reviews within the group must be
coordinated with the GECP In-charge and the GECP In-charge is required to sign-
off on Group Position Sheets accompanying all credit requests.
All updates on corporate developments must be provided to GECP as well as CRRS.

In order to ensure that account managers are fully aware of their customer’s
status, SAMs will be responsible to provide these updates in a timely manner.
The above-mentioned responsibilities should also be incorporated in the relevant

job descriptions.
2.2.6 Use of CRMIS for capital calculation under the Standardised Approach
Pending full implementation of core banking solution SYMBOLS across the bank to
capture the credit exposures and considering bank’s inability to provide firm
implementation timelines for deployment of modules with all the required data
fields/ functionalities etc., ) and that not all lending exposures are captured in
SYMBOLS (e.g., CAMS and CTL are being used to record consumer finance and
credit card exposures respectively), the Bank is using Credit Risk Management
Information System as a secondary data source (which captures domestic credit
exposure). Regulatory Capital Module in CRMIS is being used to calculate
regulatory capital for credit risk as per SBP guidelines.
The detailed processes for assignment of customer/ group IDs, exposure

aggregation, marking of asset classes and capital calculation (including the use of
CRMIS and RCM in these respects) are covered in the subsequent paragraphs.
23
2.2.7 One Customer - One ID
In order to get an overall view of the individual customer / group across the whole
bank and to effectively automate the exposure aggregation process, it is imperative
that there be one single pivot point. In order to achieve this, a framework for
assignment of unique customer ID (explained in the Appendix I to Chapter 2.2) has
been developed. This would ensure accurate aggregation of exposure across various
systems and hence correct assignment of customers into Basel-II asset classes.
Group Identification
To get a consolidated view of credit risk on a group level, it is imperative to
aggregate credit facilities to a group of related borrowers. These may be
independent legal entities according to SBP PRs, and/or with different legal
ownership, but from the bank's point of view they are sufficiently interdependent so
that the performance of one may have a direct or an indirect impact on the other.
Assignment of Group IDs (GID)

In order to aggregate group exposures, it is important to develop a framework for
assignments of group IDs which can take care of the complex inter group
relationship of different companies and is robust and flexible enough to cater to all
the different requirements which may arise from time to time. Considering the
above facts, a framework has been developed, the details of which are given in the
Appendix II to Chapter 2.2.
Group ID9 Management

It will be the responsibility of Data Control & Validation Unit (DCVU) within CRRS
to allocate and manage Group IDs and to ensure group data integrity so that
accurate data is available for analysis and decision making purposes. DCVU after
getting information from business units/ credit review will incorporate the related
GIDs in the account profile and will also have the discretion to modify the group
details of an account as and when required after getting confirmation from credit
review. Groups will be reviewed on quarterly basis in order to capture any change /
update in group compositions. It will be the responsibility of the Business Units /
Credit Review to report any new relationships among different accounts / changes
in existing group compositions to CRRS immediately upon identification,
irrespective of the decided review period, so that the changes can be made in
CRMIS on time to ensure accurate / updated group compositions. Credit Review
will be the final authority in case of disputes on grouping / de-grouping.
Roles and Responsibilities for assignment/use of GIDs

It is not possible for only one department to accurately assign GIDs. For proper
checks and balances and to ensure data integrity, following are the responsibilities
of different departments:
RMs / Business Units: Credit Initiation
• Customer group is to be identified at the time of exposure initiation based on

the prescribed Group Identification Criteria.
9 Operational details shall be covered separately in CR-MIS Documentation
24
• When initiating any credit proposal Business Units will confirm whether it is an
existing or a new relationship and Credit Review will sign off on it. In case of
new group relationship, Business Unit will submit information of such
relationship based on prescribed Group Identification Criteria corroborated/
supported by tangible evidence e.g., corporate/ shareholding structure,
directorship, guarantee information etc.
CRRS: Validation
• Compile a bank-wide list of counterparty group relationships, duly identifying

the customers forming part thereof, based on the information provided by
Business Units. Concurrence to the list shall be obtained from Credit Review.
In case of any dispute regarding group composition Credit Review shall be the
final authority.
• Set up GID Database into CRMIS based on approved listing of group

relationships.
• Update any new/ modified Group codes in the approved list of group
relationships considering the information provided by Business, and
communicate any errors identified based on the knowledge of such
relationships and review of documentary supports. They should re-circulate the
amended list to all concerned.
• Going forward, group database to be made available to Business, Credit Review,

CRC and nominated RMs.
2.2.8 Credit Risk Management Information System
Credit Risk Management Information System is an in-house developed application

to capture counter party credit exposure at branch level. The system has been
designed keeping in view SBP guidelines and best practices.
CRMIS will be used for capturing and aggregation of credit exposure till the time
that core banking solution (SYMBOLS) is fully implemented with complete
functionalities at bank-wide level.
The following system related aspects will be addressed for effective exposure
aggregation across the bank:
• CRMD shall be responsible for adequate system administration and

maintenance.
• CRMD will ensure appropriate designing of CRMIS including provision of

necessary data fields, specifications and functionalities as required for
assignment of CID and GID and accurate customer exposure aggregation. Such
data fields/functionalities, as far as applicable, should also be ensured in the
other related lending systems at the bank.
25
• ITG will, in coordination with CRMD and related Business Units, ensure
integration/ detailed (field-to-field) mapping of CRMIS with other systems (like
CAMS, CTL, HRMS, CMRMM etc.). CRMD will decide on the mandatory data
fields in CRMIS i.e. the fields that would have to be filled in by the data entry
personnel in all cases. This will primarily represent information that would be
required to enable correct classification of customers into their respective Basel
II asset classes under the Standardised Approach. The list of such fields,
together with the input controls, will be set out in the CRMIS documentation
which all the concerned employees will be required to follow.
• Appropriate validation checks shall also be incorporated on key fields (e.g.,

mandatory fields, access controls, data entry/ validation checks e.g., range
checks, limit checks and format checks etc.) in order to prevent incorrect entries
e.g., random numbers or junk data etc. and restrict unauthorised entries.
• As a minimum, it should be ensured that CRMIS captures all the lending data
at the bank either by direct data feed or through interfaces with other systems
so that interfaces with capital calculator can be minimised to the most possible
extent. For this purpose, data pertaining to overseas operations, staff loans etc.
shall be adequately captured in CRMIS, going forward. It should also be
ensured that lending data aggregated is both for the on-balance sheet exposures
(both limit and outstanding) and off-balance sheet exposures (both limit and
utilised).
• Further operational details, including the description of data fields/ system

features/ specifications, system/ data flows together with related controls etc.,
in relation to the above will be covered in CRMIS documentation.
Data Quality/ Integrity
The respective Business Units will be responsible to ensure that all the related data
(financial as well as non-financial) is completely and accurately captured/ updated
in the systems (e.g., CRMIS, SYMBOLS, CAMS, CTL etc.) and that aggregated
exposures are in agreement with the general ledger. They will also be responsible
for any special data entry population/ cleansing/ reconciliation exercises (in
relation to both the new/ existing fields in CRMIS/ other systems) taken to ensure
availability of complete and accurate data, as required for calculation of capital
under the Standardised Approach and the advanced approaches, going forward.
In cases where outside services are sought by the bank in relation to any such
special exercise, these Business Units will continue to assume ownership of data
pertaining to their business as captured/ fed by the special teams into the systems.
In any case, they would remain responsible to ensure data capturing and
availability of complete and accurate data going forward once required data is
captured/cleansed with outside assistance as of a cut-off point in time.
Going forward, the bank will also develop a mechanism for data exceptions noted
by MIS Officers/ CRMD / CRC to affect the performance appraisal/ audit rating of
the concerned Business Unit.
26
Reconciliation between CRMIS and GL balances
Following shall be considered in relation to reconciliation between CRMIS and GL

balances:
• Branches/ Business Units shall be responsible to ensure that aggregated

exposure as per CRMIS matches with the GL for all type of exposure and
accrued mark-up and difference, if any, is duly supported by proper
reconciliation.
• Differences will be identified by MIS Officers at the circle offices, product-
wise, for each branch falling within that circle
• CRRS will monitor the differences and issue instructions for compliance
2.2.9 Assignment of Asset Classes
Necessary features have been built in the system for identification of Basel asset
classes based on set of rules supported by detailed mapping of relevant fields with
Basel asset classes. The mapping will be adequately documented and will become
part of the CRMIS documentation.
Going forward, the bank will consider introducing separate field in Treasury system
and assign Business Units to capture the information based on detailed
understanding of such asset classes provided to them.
CRRS shall ensure that PSE exposures are correctly categorized as per SBP issued
guidelines and relevant lists.
2.2.10 Regulatory Capital Calculation for Credit Risk
CRMD has developed Regulatory Capital Model (RCM) for accurate calculation of
capital requirement for credit risk under the Standardised Approach. RCM has all
the required data fields/ functionalities.
RCM has all the required inputs as necessary for aggregating exposures, assigning
correct asset classes to the aggregated exposures, applying related risk-weights for
calculating risk-weighted assets and capital required.
Following specific functionalities has been included in RCM:
• Automated tagging/ filtering of exposures as per the Basel asset classes

based on set criteria.
• Automated tagging/ filtering of retail exposures to the relevant portfolios (i.e.
regulatory retail portfolio/ claims secured by residential property) based on
set criteria.
• Monitoring of exposures, in order to re-categorise these exposures between
different asset classes (mainly retail to non-retail and vice versa) in the event
of change in the set categorisation criteria
• Output categorised exposures to the capital calculator for use in calculating
the capital charge required
27
• Ability to increase/ decrease number of criteria, and to modify existing

criteria for exposure categorisation
Further operational details, including the description of data fields/ system

features/ specifications, system/ data flows together with related controls etc., in
relation to the above is covered in RCM documentation.
Monitoring of Customer and Group Limits
CRMD will calculate per party limit under the Prudential Regulations, based on the
information provided by FCG and disseminate such limits bank-wide.
Going forward, the bank will develop a mechanism for monitoring of exposures by
CRC on a periodic basis using relevant systems. In this connection, necessary
features shall be introduced and CRC will be provided access to the systems to use
it for the said purpose. Since this is dependent on system enhancement
(capabilities of Symbol’s CL and LM module), same shall be implemented with the
approval of Group Head RMG as soon as the above mentioned features are made
available in Symbol’s CL and LM module after its full implementation in all
branches.
Role of Internal Audit
Internal Audit shall be responsible for reviewing the structure, systems and
process, aggregation of customers’ exposures, assignment of asset classes and the
calculation of capital. They will also update the Internal Audit Policy/ Guide to
specifically include audit/ review of policies, procedures and guidelines for
exposure identification, aggregation and categorisation (including criteria for such
identification and capture of required information into the systems).
28
2.3 Procedure for Target Market

and Risk Asset Acceptance
Criteria
2.3.1 Introduction
2.3.2 Suggested Key Components / Elements of
Business Strategy
29
2.3.1 Introduction
Target Market (TM) identification is a key component of business strategy

formulation process. This chapter deals with the procedural level details for
development of Target Market studies and Risk Asset Acceptance Criteria.
2.3.2 Suggested Key Components / Elements of Business Strategy
Target Market (TM) Industry – Sector Studies
The Target Market (TM) identification process is an integral part of the strategy
formulation phase of the Bank and shall be conducted at the business group level.
The objective of this process is to develop a focused approach for each business
group to meet the targets / objectives. The TM, in this context, shall highlight the
acceptable profile of prospects / customers to which the Bank markets products
bearing an element of credit risk. For identifying TM, Bank shall focus its efforts, by
ascertaining:
• the country’s economic development;
• the characteristics of industrial / economic sectors that the Bank wants to

target and the growth / earnings potential;
• the risks specific to those sectors, cyclicality and the stage of the cycle;
• the critical success factors specific to those sectors;
• the forecasted short term / long term trends in the targeted sectors, and the
micro and macro-economic factors influencing the same;
• differentiating the high value clients in those sectors; and
• The specific short term / long term business opportunities for the Bank, based
on the needs of the identified clients, in the respective sectors.
Risk Asset Acceptance Criteria (RAACs)
RAACs represent the minimum conditions under which the Bank is prepared to
enter into transactions bearing an element of credit risk. Accordingly, only those
clients that exceed the defined RAACs benchmarks shall be targeted in the
Business Unit’s marketing effort. RAACs are normally set by benchmarking for the
critical success factors associated with the industry sector.
Categories in RAACs can cover the following:
• Customer size (in terms of market share, revenue, equity, etc.)
• Customer’s financial condition (ratios relevant to industry / market, regulatory

requirements)
30
• Management / Ownership structure
• Any other relevant factor deemed appropriate by the business group for the
specific industry / market (shall flow from the industry critical success factors
identified as a part of the TM study)
Business Units will be responsible for conducting target market (TM) studies in
accordance with the prescribed process, which will highlight both products and
client segments to be marketed and develop Risk Asset Acceptance criteria.
RAACs shall be developed by businesses in consultation with RMG. Any violations/

deviations/ exceptions shall be approved by the President / Group Head Risk
Management.
TM / RAACs - Scope of Application
The Bank’s credit portfolio is diversified across a large number of economic /

industrial sectors. RMG shall undertake industry studies (and consequently
business groups shall establish specific TM and RAACs) for each industrial sector
where the bank’s exposure is 10% or higher, or on a need basis.
As a rule, cash / near-cash collateralized exposures would be excluded from TM /

RAACs criteria.
TM is a continuous process and high risk industries may be reviewed more

frequently as and when required.
Deviations
Any deviation from the approved RAACs would require approval as per the Group
Head Risk Management notified approval matrix. The relevant business group
would elevate a memo giving details of the deviation approval requested as well as
justification for the same. An annual report containing details of all such deviations
approved by the President shall be communicated by the businesses to RM&PRC
through Group Head Risk Management.
Product Programs
Products covered under product programs contain their own TM / RAACs in the
program document (i.e. the PPM) and shall be approved as part of the PPM.
Target Market and RAACs Guidelines
Step 1: Identification of Target Industries / Sectors
Target market studies identify key economic sectors keeping in view the following:
o Major industrial sectors of the economy and their contribution to GDP.
o Growth trends and sources of growth across various industrial sectors.
31
o Market size and segmentation of the various key sectors of the economy.
o Government priorities and regulations based on following:
• Strategic importance to the country (export based, import substitution,

etc.)
• Amount spent on acquiring products / services of the type that the Bank
offers
• Credit quality and industry stability
Step 2: TM Studies and Industry Analysis
The target market process starts with an analysis of the political and macro-
economic conditions of the country wherein various macro-economic factors are
required to be analysed. The next step is to undertake a detailed structural,
financial and competitor analysis of each target industry to identify the key success
factors for above average performance in the specific sector. This would be achieved
through completion of detailed industry studies on the selected sectors. The studies
should contain analysis and conclusive recommendation, focusing on:
• Industry structure, dynamics, competition and trends

• Key management skills required in the industry
• Key success / risk factors
• The role of government in the industry
• SWOT analysis
One of the deliverables of this process would be a list of names acceptable to the
bank. A detailed format for conducting industry studies is attached as Appendix I
to Chapter 2.3.
Step 3: Establish minimum criteria that must be met by selected TM names
Industry RAACs should be recommended, establishing the minimum pricing,

product offering, and security / documentation requirements and the maximum
per borrower limit.
32
2.4 Portfolio Management and

Stress Testing
2.4.1 Portfolio Management
2.4.1.1 Introduction
2.4.1.2 Framework
2.4.1.3 Concentration Management
2.4.1.4 Credit MIS
2.4.2 Stress-Testing
2.4.2.2 Stress-Testing Techniques
2.4.2.3 MCB’s Approach
2.4.2.4 Roles, Responsibilities and
Timelines
2.4.2.5 Industry Best Practices
33
2.4.1 Portfolio Management
Credit portfolio of a bank is typically the largest asset and the main source of
revenue; while at the same time, it is one of the greatest sources of risk to a bank’s
safety and soundness. Due to lax standards, poor portfolio risk management or
weakness in the economy etc., a bank may face major losses/ failure. Credit
Portfolio Management is the process by which risks that are inherent in the credit
portfolio are managed and controlled.
The main objective of MCB’s Credit Portfolio Management is to manage risk at

portfolio level.
The key parameters that impact the credit risk of a portfolio are:
• Underlying credit risk
• Exposure positions (concentration)
• Default correlation
2.4.1.2 Framework
The Risk Management Framework of the bank would involve identifying,
monitoring, measuring and controlling credit risk. To achieve this goal it is
imperative to manage the credit portfolio in such a way to optimising credit risk.
The main objective of MCB’s Credit Portfolio Management function is to understand
credit risk at portfolio level on the basis of consistent criteria. This involves
calculating the bank’s exposure and monitoring limits in line with its credit risk
policies and goals.
Following are various activities that shall be catered by the Credit Portfolio
Management Function:
• Defining a Portfolio
• Set limits and manage concentrations – ex-ante and post-ante
• Establish objectives and measure performances
• Aggregating credit risk of an obligor
Aggregation of credit risk is vital to compare risks on a bank-wide basis. For this,
the bank manages credit risk at a central point and calculates the same across
businesses, regions, groups and different obligors based on consistent criteria.
Standardizing risk measures in the long run would involve implementing a

valuation framework so that all the products and risks can have an economic
value, so as to compare products and risks. Internal rating framework once
developed shall complement Portfolio Management and enable bank to calculate
PD (Probability of default), LGD (Loss given default) and EAD (exposure at
default).
Going forward, Credit Portfolio Management function will be strengthened within

RMG by implementing an appropriate portfolio management system to cater
portfolio management requirements.
34
2.4.1.3 Concentration Management
The bank’s management shall apply exposure caps and risk tolerance limits to
appropriate sectors and individual borrowers. Senior management shall also
periodically evaluate each lending unit’s business and marketing plans for lending
policies related to new target market / product-mix and underwriting criteria.
Credit Portfolio Management involves looking at the entire segments of the

portfolio (groups of loans with similar risk characteristics) and defining tolerance
levels. In addition, LPM shall also segment the portfolio in a number of different
ways - for example by loan type, industry, geography, structure, collateral, tenor,
risk of default or loss, etc.
Managing concentrations and setting limits are one of the primary objectives
of MCB’s portfolio management function. Limit setting process should take into
account bank’s strategy, risk appetite, competitive advantage, systems and level
of diversification. While these variables should be kept in mind while setting
limits, it would involve setting limits in respect of following:
• Industry-wise
• Obligor-wise
• Obligor Group-wise
• Customer categories (as identified under Prudential Regulations)
• Regulatory portfolio limits
Some of the most significant parameters are explained below:
Industry-wise: A limit on the maximum amount of credit facilities that can be

extended to borrowers in a particular industry should be in place. The amount
should be decided in consultation with the Business Representatives with input
from Portfolio Management and Credit Review and would be finalized by the Group
Head WBG, CBBG, RMG and the President.
Obligor-wise: The maximum amount of credit facilities (within regulatory limits)

extended to any single borrower regardless of the industry and type should also be
in place. The amount should be decided in consultation with the Business
Representatives and Credit Review and would be finalized by the Group Head
WBG, CBBG, RMG and the President.
Limit setting and the determination of the bank's exposure should be done in light
of past record, changing financial structure of the entity, equity of borrower and
collateral. This limit setting has the advantage of overcoming the problem faced
when the obligor has multiple functions covering many sectors/industries. This
holds for both; large corporate entities and SME's (Small and medium size
enterprises).
Obligor Group-wise: Group limits are covered under prudential regulations of

the State Bank. Internal group limits will be established to restrict the bank's
exposure on a per party basis. The amount should be decided in consultation with
the Business representatives and Credit Review and would be finalized by the
Group Head WBG, CBBG, RMG and the President.
35
2.4.1.4 Credit MIS
The effectiveness of the bank’s Credit Management Function process largely

depends on the quality and availability of management information systems (MIS)
and many of the advancements in effectively managing the credit portfolio will be
the direct result of the robust MIS. The Credit Portfolio Management function at
MCB would continue to evolve over time and would endeavour to generate the
following MIS for senior management/ RM&PRC subject to the availability of
adequate systems and data:
• Portfolio reports including trend analysis business wise, industry wise, NPL
analysis, new relationships etc.
• Stress-testing Reports
• Projection on a portfolio level
• Sensitivity analysis
• Limit Reports
• Portfolio concentration analysis
• Analysis of credit risk inherent in the loan portfolio
2.4.2 Stress-Testing
Stress testing provides a way to quantify the impact of changes in a number of risk
factors on the assets, liabilities and P&L of a financial institution. Stress tests are
primarily designed to quantify the impact of possible changes in economic
environment on the financial system. The system level stress tests also complement
the institutional level stress testing by providing information about the sensitivity
of the overall financial system to a number of risk factors. These tests help to
identify structural vulnerabilities and the overall risk exposure that could cause
disruption of financial markets.
Stress-Testing definition
Stress-testing refers to a range of techniques used to assess the vulnerability of a
financial institution to “exceptional but plausible” shocks.
2.4.2.2 Stress-Testing Techniques
• Simple Sensitivity Analysis

It measures the change in the value of portfolio for shocks of various degrees to
different independent risk factors while the underlying relationships among the
risk factors are not considered.
• Scenario Analysis
It encompasses the situation where a change in one risk factor affects a number
of other risk factors or there is a simultaneous move in a group of risk factors.
Scenarios can be designed to encompass both movements in a group of risk
factors and the changes in the underlying relationships between these variables
(for example correlations and volatilities). Stress testing can be based on the
36
historical scenarios, a backward looking approach, or the hypothetical scenario,

a forward-looking approach.
• Extreme Value / Maximum Shock
It measures the change in the risk factor in the worst-case scenario, i.e. the
level of shock which entirely wipes out the capital.
2.4.2.3 MCB’s Approach
MCB would adopt a phased approach to implement stress testing guidelines for the
credit portfolio. In the first phase, the Bank will comply with minimum SBP criteria
and design/construct stress tests according to the SBP documentation. In the
second phase the bank will adopt international best practices as it is going forward
with the implementation of advanced internal ratings approaches under the SBP
Basel II Framework.
Phase 1: Adoption of SBP Guidelines

The Banking Supervision Department of SBP has given a set of detailed guidelines
namely “Stress Testing Guidelines 2005” in BSD Circular no.5 of 2005. It deals
with all of the different approaches, methodologies and framework for stress
testing.
Scope of SBP Stress Testing Guidelines

The scope of the stress test is limited to simple sensitivity analysis. Five different
risk factors namely; interest rate, forced sale value of collateral, non-performing
loans (NPLs), stock prices and foreign exchange rate have been identified and used
for the stress testing. Moreover, the liquidity position of the institutions has also
been stressed separately. The tax-adjusted loss arising from the shocked position
will be adjusted from the capital. The revised CAR will then be calculated after
adjusting total loss from the risk-weighted assets of the bank/DFI.
Phase 2: Capacity enhancements for Industry Best Practices / Basel-II Criteria

With the adoption of Basel II advanced approaches it is expected that the Bank
would have the necessary data in place to carry out stress tests according to
international best practices. This would require MCB to use sophisticated portfolio
management models to deal with the multi-variable stress tests.
2.4.2.4 Roles, Responsibilities and Timelines
MRMD shall be responsible for conducting stress testing and reporting the results
as per SBP prescribed timelines and parameters for consolidation and onward
submission to SBP. The results of these periodic stress testing exercises shall be
reported to the senior management and RMPRC (on as and when required basis).
2.4.2.5 Industry Best Practices
The following is the methodology / steps that will be followed, once MCB has the
system functionality, in order to conduct detailed stress analysis that would
contribute towards development of our Bank’s strategy in response to macro and
micro economic shocks.
37
• Defining the scope of the analysis

Future scope of the analysis will depend upon the nature of risks to be analysed
and on data availability. The greater the amount of data that will be available
the greater would be the scope of stress test that we will be able to conduct.
• Designing and calibrating macroeconomic stress scenarios

This will depend upon type of risks to be analysed (e.g. market, credit, interest
rate, liquidity, etc.), whether single or multiple risk factors are to be stressed,
what parameter(s) to stress (prices, volatilities, correlations), by how much
(based on historical or hypothetical scenarios) and over what time horizon. All of
these factors have to be decided upon after analysis of availability of original
data.
Use of a wide range of risk factors and incorporating multiple shocks allow for
more realistic predictions as compared to ad-hoc sensitivities of single
parameters. Shocks can be calibrated to the largest past movement in the
relevant risk variables over a certain horizon or be based on historical variance.
• Assessing system vulnerability to specific risk factors

The impact of macroeconomic shocks on the stability of the financial system
can be measured using econometric analysis. This would help us to assess
financial sector vulnerabilities over time and identify country or Bank specific
factors.
• Integrating the analysis of market and credit risks

Changes in macroeconomic fundamentals or in asset prices may directly affect
the market value of banks’ assets and liabilities. Moreover, large swings in asset
prices can lead to significant volatility in debt-to-income ratios for both
households and firms. The impact of asset price shocks on the solvency of
banks’ obligors and, in turn, on the credit quality of banks’ portfolios,
represents a primary source of concern in the analysis of systemic risk. In fact,
a given macroeconomic shock can lead to both market losses and to changes in
the credit quality of the obligors (which implies potential mark-to-market losses
in the loan book).
• Aggregation and interpretation of results

The information obtained from the analysis of individual financial indicators
needs to be combined for an integrated assessment of the overall vulnerability of
the financial system to any given stress scenario. Correlations and interlink
ages among the risks faced by individual institutions should be captured to
provide a holistic view.
38
2.5 Credit Risk MIS
2.5.1 Introduction
2.5.2 Credit Risk MIS at MCB
2.5.3 The Way Forward
39
2.5.1 Introduction
A management information system (MIS) is a system or process that provides the

information necessary to manage an organization effectively. MIS is viewed and
used at many levels by management. It should be supportive of the institution's
long term strategic goals and objectives.
An institution's MIS should be designed to achieve the following goals:
• Provide a system for recording and aggregating information.

• Support the organization's strategic goals and direction.
• Reduce expenses related to labour-intensive manual activities.
• Enhance communication among employees.
2.5.2 Credit Risk MIS at MCB
The bank needs a comprehensive information system that can cope with the
varying information needs of the management for planning, policy making, and
decision support, while ensuring its consistency, comparability, integrity and
accuracy.
In order to achieve the above stated objectives bank has upgraded legacy systems
by redesigning and integrating them into ‘One Mother System’ namely Credit &
Risk Management Information System (CRMIS) using latest software tools.
CRMIS has not only helped in resolving data integrity issues but has also reduced
errors and reworks. This has also improved the data quality and is a more reliable
source of information for different user groups engaged in processing, monitoring
and managing the credit portfolio.
CRMIS project has achieved following high level objectives:
• A point-in-time database for customer information

• Complied with the Basel-II Accord and other regulatory requirements.
• Decreased errors and reworks and increased productivity.
• Provided improved access to data needed for decision making.
• Improved data quality so that it can be used as a reliable source of information.
• Generated a series of reports to meet diversified user requirements and provide
facility to export data for customized reports.
• Reduced manual preparation of regulatory returns by automating the tasks and
incorporating such reports into this system.
Data flow and job scheduling is given at Appendix-I to Chapter 2.5.
2.5.3 The Way Forward
CRMIS is essentially a system dependent upon manual punching and works as

disintegrated standalone application. In order to overcome these shortcomings the
bank has decided to implement a fully functional core banking solution with all
40
required functionalities and data fields. Going forward all modules of SYMBOLS will
be implemented. Till that time CRMIS will be used a stop gap arrangement and
requirements for managing credit risk will be met through CRMIS.
Upon completion of Symbols deployment CRMIS will be retired and bank’s MIS
structure will be shifted on SYMBOLS.
41
2.6 Internal and External Credit

Ratings
2.6.1 Introduction
2.6.2 Conventional Approach
2.6.2.1 Existing Formats
2.6.3 Basel-II Credit Risk Standardised Approach

(External Credit Ratings of Borrowers)
42
2.6.1 Introduction
Risk rating is an essential tool for effective identification, measurement and

monitoring of credit risk at the counterparty level. Rating systems measure credit
risk and differentiate various credits by the magnitude of credit risk that they pose
to the bank. It allows the bank’s management to monitor changes and trends in
risk levels.
For rating a credit, banks develop their own internal rating systems and / or rely
on External Credit Assessment Institutions. With only few External Credit
Assessment Institutions (ECAIs) available in Pakistan, more often than not it is the
internal rating system of a bank that rates a particular credit.
Banks across the industry are developing more robust internal rating systems in
order to increase the precision and effectiveness of credit risk measurement and
management process. This trend will continue as banks expand the scope of
internal ratings to include allocation of regulatory capital for credit risk in
accordance with Basel Committee on Bank Supervision’s Internal Ratings Based
approach to capital allocation.
This chapter covers the following topics.
• Traditional approach to internal ratings (presently used at MCB)
• Use of external ratings for Basel-II capital calculation (to comply with the Basel-
II Standardized approach for Credit Risk)
Going forward, the bank will develop internal rating templates in accordance with
the provision of the SBP Basel II Framework during its transition to the FIRB
Approach to credit risk. In this regard, the bank will develop Credit Risk Modeling
function within CRMD appropriately manned by personnel of required specialized
skill and competence. This function shall be responsible for the design or selection,
implementation and performance of the bank’s internal rating systems jointly with
the Business Units.
2.6.2 Conventional Approach
Presently, the bank uses two different formats for internally rating its customers;
one for Corporate - Commercial customers and the other for Corporate - Large
customers. These formats have been discussed in detail in the later sections of this
chapter. All Credit Proposals are required to be accompanied by the respective
customer ratings on the relevant formats.
All changes to the existing templates shall be authorised by Group Head Risk
Management.
The methodology / approach followed for development of existing internal rating

templates for both Corporate - Commercial and Corporate - Large customers is
similar. Some key aspects of the methodology are given below.
43
• The selection of variables (e.g. financial ratios, management information, etc.)

included in the template is based on subjective assessment only. The decision to
whether include or exclude a variable is not based on any statistical analysis
conducted on historical data.
• The final output of the template is a customer rating on a numeric scale

(ranging from 1 to 7 for Corporate - Commercial customers and from 1 to 12 for
Corporate - Large customers). Each numeric rating has a subjective description
(detailed in later sections of this chapter).
• The methodology does not involve back-testing of the template on sample data
(from actual customers) to ascertain the accuracy of the model’s output.
• Since the methodology is purely subjective, output of the existing rating

template does not directly relate to the following.
o Loan pricing decisions (though effort has been made to relate internal
ratings of Corporate Large customers with a pricing grid, as explained in
detail in later chapters)
o Decisions on allocation of capital for a specific credit (only more

sophisticated and back-tested internal rating models can determine the
amount of capital to be allocated for any specific credit, which the bank
envisages to develop under the FIRB Approach to credit risk, going forward).
2.6.2.1 Existing Formats
The two existing rating formats are discussed in detail as follows.
Credit Risk Ratings: Corporate - Commercial Customers
The Credit Risk Rating scorecard for Corporate - Commercial Customers had been
developed after taking into account the fact that financial and other disclosure
requirements of this sector are not as elaborate as the Corporate - Large sector and
there are critical data integrity issues. Hence, the level of reliance placed on
financial information is lower compared to the scorecard for the Corporate - Large
sector.
Scales / Grades
There are following seven grades for rating Corporate - Commercial customers.
Risk Rating I: Superior

High and stable profitability, liquidity and debt coverage ratios with high net-
worth. This is expected to continue in the long run as well. Financial performance
not expected to fluctuate substantially by changes in the business cycle. Ready
access to financial markets with ability to absorb severe disturbances in
economic and financial markets.
Risk Rating II: Very Good

Strong financial position (sales, operating margins, net worth, etc.). This is not
expected to deteriorate in the near future; however, financial performance may
44
fluctuate slightly with changes in the business cycle. Ready access to financial
markets with ability to withstand major financial market disturbances.
Risk Rating III: Good

Overall stable financial performance (sales, operating margins, etc.) with high net-
worth but susceptible to adverse economic movements, industry changes and
business cycles. Has access to financial markets under all circumstances with
ability to withstand long-term market disturbances.
Risk Rating IV: Acceptable

Financials are reasonable enough to provide assurance in stable conditions.
Operating performance can fluctuate as a result of competitive or economic
pressures and cyclical trends of industry & business. Risk elements exist. May
have difficulty in absorbing short-term market disturbances or financial volatility.
Risk Rating V: Marginal

Marginally acceptable / overall weak financial performance. Market volatility can
cause problems therefore warrants more than normal level of supervision.
Performance subject to economic and market stability. Absorption of Short-term
market disturbances or financial volatility will be difficult.
Risk Rating VI: Watch-list

Imminent warning for weakness. Warrants more than normal level / frequency of
monitoring and reporting to management. Any adverse market disturbance /
financial volatility will put the relationship in distress.
Risk Rating VII: Classified

Regulatory classification
Application
All Corporate - Commercial customers for both funded and non-funded facilities
shall be rated. The relevant branch / relationship team shall work out the Credit
Risk Rating (CRR) of each customer at the time of processing the Credit Proposal
for the first time; updating / review of customer ratings shall be a continuous
process and is the responsibility of business. All updated / reviewed ratings shall
be immediately communicated to the relevant credit approval / review authority
along-with the appropriate reasons for down-grades / up-grades.
The relevant credit approval/review authority shall have the authority to finalize /
change the CRR of any customer as assigned by the branch / relationship team.
The approval/review authority must, however, advise the relevant branch /
relationship team in case any change is made to a customer’s CRR.
During their respective reviews, Audit and RAR shall have the authority to revise
the CRRs of customers with due justification, in cases where, in their opinion,
customer’s internal rating, as assigned by the branch / relationship team, does not
represent the true risk profile of the counterparty.
All credit proposals and other internal credit related correspondence must clearly
indicate the customer’s CRR.
Individual customers within a certain group may qualify for different CRRs on the
basis of their distinct risk profiles. In such cases, an appropriate CRR for the group
shall also be determined. This will be done as follows.
45
• The CRR of the group shall be the weighted average CRR of individual
accounts/ limits within that group.
• In case there is even one VI or below rated name in a group, the group would
not qualify for a rating above IV.
CRRs should not be shared with the borrowers.
Ratings review will be an on-going task. However, as a minimum, the ratings shall
be reviewed and updated, where applicable, on an annual basis. In case of
borrowers on watchlist or being high-risk, the frequency shall be increased to at
least bi-annually. For the purpose of informed rating reviews, Business Units
should ensure obtaining and updating, on a periodic basis, latest information
available including that of borrower’s financial and operational condition, security
structure, change in ownership, non-compliance of SBP instructions etc. Whenever
any material information on the borrower comes to light, new ratings must always
be assigned.
The Format to be used for ascertaining the CRRs of all Corporate - Commercial
customers and the Security Class List to be used for the purpose are contained in the
Appendix I to Chapter 2.6.
Credit Risk Ratings: Corporate - Large Customers
In comparison to the scorecard for rating Corporate - Commercial customers, a

more comprehensive Credit Risk Rating template is applicable to the bank’s
Corporate - Large customers. The template for Corporate - Large customers is
based on assessment of both qualitative and quantitative factors. Relatively
elaborate financial variables have been incorporated in the template keeping in view
the fact that Corporate - Large customers have more extensive financial disclosure
requirements as compared to Corporate - Commercial customers.
Scales / Grades
There are twelve grades for rating Corporate - Large customers.
Risk Rating I: Exceptional

Extremely high and stable profitability, liquidity and debt coverage ratios with
high net-worth. This is expected to continue in the long run as well. Financial
performance not expected to fluctuate substantially by changes in the business
cycle. Ready access to financial markets with ability to absorb severe
disturbances in economic and financial markets.
Risk Rating II: Superior

Strong financial position (sales, operating margins, net worth, etc.). This is not
expected to deteriorate in the near future; however, financial performance may
fluctuate slightly with changes in the business cycle. Ready access to financial
markets with ability to withstand major financial market disturbances.
Risk Rating III: Very Good

Overall stable financial performance (sales, operating margins, etc.) with high net-
worth but susceptible to adverse economic movements, industry changes and
business cycles. Has access to financial markets under all circumstances with
ability to withstand long-term market disturbances.
46
Risk Rating IV: Good

Financially & operationally stable for medium term, but susceptible to cyclical
trends of industry and business. Concentration of business risk - by product or
by market - may be present. May have ready access to financial markets under
normal market conditions. Has ability to withstand short-term market
disturbances.
Risk Rating V: Satisfactory

Financials are reasonably sound and have some margin of protection. Operating
performance can fluctuate due to competitive or economic pressures and cyclical
trends of industry & business. Risk elements exist but near term performance of
no concern with ability to withstand short-term market disturbances.
Risk Rating VI: Acceptable

Financials are reasonable enough to provide assurance in stable conditions.
Operating performance can fluctuate as a result of competitive or economic
pressures and cyclical trends of industry & business. Risk elements exist. May
have difficulty in absorbing short-term market disturbances or financial volatility.
Risk Rating VII: Marginal

Marginally acceptable / overall weak financial performance. Market volatility can
cause problems therefore warrants more than normal level of supervision.
Performance subject to economic and market stability. Absorption of Short-term
market disturbances or financial volatility will be difficult.
Risk Rating VIII: Watch-list

Imminent warning for weakness. Warrants more than normal level / frequency of
monitoring and reporting to management. Any adverse market disturbance /
financial volatility will put the relationship in distress.
Risk Rating IX: Overdue But Not Classified

21-days past-due.
Risk Rating X: Substandard

Regulatory classification.
Risk Rating XI: Doubtful

Risk Rating XII: Loss

Application
All Corporate - Large customers for both funded and non-funded facilities shall be
rated. The relevant branch / relationship team shall work out the Credit Risk
Rating (CRR) of each customer at the time of processing the Credit Proposal for the
first time; updating / review of customer ratings shall be a continuous process and
is the responsibility of business. All updated / reviewed ratings shall be
immediately communicated to the relevant credit approval / review authority along-
with the appropriate reasons for down-grades / up-grades.
The relevant credit approval/review authority shall have the authority to finalize /
change the CRR of any customer as assigned by the branch / relationship team.
The approval/review authority must, however, advise the relevant branch /
relationship team in case any change is made to a customer’s CRR.
During their respective reviews, Audit and RAR shall have the authority to revise
the CRRs of customers, with due justification, in cases where, in their opinion,
47
customer’s internal ratings, as assigned by the branch / relationship team, does

not represent the true risk profile of the counterparty.
All credit proposals and other internal credit related correspondence must clearly
indicate the customer’s CRR.
If in the opinion of the relevant branch / relationship team, the CRR assigned by
the template is required to be upgraded; the branch / relationship team should
elevate the case along-with detailed justifications to Group Head Risk Management
through the relevant business Group Head. Group Head Risk Management shall
evaluate the case and shall decide the matter jointly with the President. The
President and Group Head Risk Management shall have the joint authority to
approve such cases. In any case, CRR cannot be upgraded by more than one scale
/ grade.
Individual customers within a certain group may qualify for different CRRs on the
basis of their distinct risk profiles. In such cases, an appropriate CRR for the group
shall also be determined. This will be done as follows.
• The CRR of the group shall be the weighted average CRR of individual
accounts/ limits within that group.
• In case there is even one VIII or below rated name in a group, the group would
not qualify for a rating above VI.
CRRs should not to be shared with the borrowers.
Ratings review will be an on-going task. However, as a minimum, the ratings shall
be reviewed and updated, where applicable, on an annual basis. In case of
borrowers on watchlist or being high-risk, the frequency shall be increased to at
least bi-annually. For the purpose of informed rating reviews, Business Units
should ensure obtaining and updating, on a periodic basis, latest information
available including that of borrower’s financial and operational condition, security
structure, change in ownership, non-compliance of SBP instructions etc. Whenever
any material information on the borrower comes to light, new ratings must always
be assigned.
The Format to be used for ascertaining the CRRs of all Corporate - Large customers is
contained in the Appendix I to Chapter 2.6.
It must be ensured that the above-mentioned templates are used consistently

across the bank for rating of relevant entities. Business Units dealing in different
types of exposures shall use the applicable templates, as the case may be. This will
ensure consistency and uniformity in rating assignment.
In case of projected information, rating assignments must be based on conservative

view of such information as there are difficulties in forecasting future events and
the influence they will have on a particular borrower’s financial condition and the
fact that data available in most cases is limited.
48
Credits with deteriorating ratings should be subject to additional oversight and

monitoring, for example, through more frequent visits from credit officers and
inclusion on a watch-list that is regularly reviewed by senior management.
Credit Risk Rating: FIs, Securities Firms and Insurance Companies
Previously FIs, Securities Firms and Insurance Companies were exempted from the
requirement of internal rating, on account of pending development and
implementation of FIRB compliant rating models.
In order to ensure compliance with regulatory instructions during the intervening

period, the following shall be applicable:
1. Internal rating template for Corporate-Large customers shall be used for

internal rating of Securities Firms.
2. Publically available external ratings of FIs and Insurance Companies by JCR-

VIS and PACRA shall be used as a proxy for internal rating (for credit decisions
and SBP reporting purposes) as per mapping conveyed through CRMD
circulars. In case an FI / Insurance Company is rated by both JCR-VIS and
PACRA, the lower rating grade shall be used.
3. Credit Risk Rating of foreign banks operating in Pakistan (HSBC Bank Middle
East Limited, Deutsche Bank AG, Citibank NA, Barclays Bank PLC and Bank of
Tokyo-Mitsubishi UGJ Limited etc. ) shall be 1 (Exceptional). Business Groups
shall monitor the rating (S & P, Moody’s and FITCH-IBCA) of these banks and
any downgrade shall immediately be reported to RMG. Any revision in Credit
Risk Rating of the above mentioned Banks shall be approved by MCC.
4. All credit proposals and other internal credit related correspondence on FIs,
Securities Firms and Insurance Companies should clearly indicate the internal
and external ratings (for FIs and Insurance Companies) of the obligor.
5. External ratings of FIs are available on SBP website and are periodically
updated, while rating of Insurance companies are uploaded by JCR-VIS and
PACRA on their websites. For reference the latest available ratings of FIs and
Insurance companies have already been circulated through CRMD circular.
It must be ensured that that CRR of all customers, including FIs/ Securities
Firms/ Insurance Companies, are reported as part of the monthly CRMIS data.
2.6.3 Basel-II Credit Risk: Standardized Approach (External Credit Ratings of

Borrowers)
For the purpose of capital calculation for Credit Risk under the Basel-II
Standardized Approach, risk weights are assigned individually to both the on-
balance sheet and off-balance sheet exposures:
a) either on the basis of credit risk assessments of counterparties as performed by

an External Credit Assessment Institution (ECAI) recognized as eligible by SBP
for capital adequacy purposes, or
49
b) As specified by SBP (based on exposure type).
SBP had issued a policy document dated July 1, 2005 outlining the eligibility
criteria for recognition of ECAIs and has recognised PACRA, JCR-VIS and ratings
scores of Export Credit Agencies for this purpose. The recognition to these ECAIs
has initially been granted for a period of two years and SBP will review their
performance and may extend the recognition for further period as deemed fit.
Banks are required to risk weight all their on and off balance-sheet exposures
(certain exceptions apply, as detailed in Section 2.4 – Risk Weights On Balance-
Sheet Exposures of SBP Basel II Framework). While all rated exposures (as well as
all exposures assigned specific risk weights by SBP) carry risk weights in the range
from 0% to 150%, all unrated exposures carry risk weights in the range from 20%
to 100% (please refer the Appendix II to Chapter 2.6).
For all off balance-sheet exposures, SBP specified Credit Conversion Factors (please
refer the Appendix II to Chapter 2.6) are to be applied to arrive at the relevant
Credit Equivalent figures before assigning the respective risk weights.
Further, there are certain Basel-II eligible collaterals (please refer the chapter on
‘Collateral Management Guidelines’) available for Credit Risk Mitigation (the
concept of Credit Risk Mitigation is introduced in the later part of this chapter) for
the purpose of capital calculation.
External Ratings
External Credit Assessment Institution - Basic Definition

The basic definition of an ECAI according to SECP’s ‘Credit Rating Companies
Rules, 1995’ is given below.
“Credit Rating Company” means a company which intends to engage in or is so
engaged primarily in the business of evaluation of credit risk through a recognized
and formal process of assigning rating to present or proposed loan obligations of any
business enterprise.
Issuer versus Issue Ratings

The definitions of issuer and issue ratings are given below.
• Entity (Issuer) rating

Entity rating signifies the level of investment risk and the capacity and / or
willingness of an entity to meet its debt obligations to senior unsecured
creditors.
• Instrument (Issue) rating

Instrument rating covers all non-equity instruments including TFCs (long and
short term), convertibles, debentures, redeemable certificates. It gives a
snapshot of the risk profile of the instrument based on the terms of the
instrument.
Selection of ECAIs and Use of ECAI Ratings

Previously, two ECAIs, namely PACRA and JCR-VIS, as recognized by SBP, are
working in Pakistan; and there is a very small number of rated issuers and issues.
50
Currently, ratings assigned by the international rating agencies namely Fitch

Ratings, Moody’s and Standard & Poors (S&P) can also be used. The entity ratings
of these international rating agencies can be used for the purpose of risk weighting
the foreign currency exposures either in Pakistan or outside Pakistan. However,
where ratings by the local rating agencies are not available for exposures in
Pakistan Rupees, ratings by these international rating agencies can be used. The
bank’s decision to choose ECAIs and solicit and use the ratings of those ECAIs for
capital calculation shall be governed by the following basic principles:
• Selected ECAIs should be recognized by the State Bank of Pakistan.
• Any one of the SBP recognized ECAIs may be used for externally rating a
particular exposure. The list of approved ECAIs shall be incorporated into the
systems for appropriate selection by the data entry personnel.
• Group Head Risk Management shall be the competent authority to select an

ECAI and decide on whether to solicit a rating or not.
• For the purpose of capital calculation:
o In case unsolicited rating is available, it shall be used for capital

calculation
o In case unsolicited rating is not available, the decision on whether to solicit

and use a rating shall be taken by the Risk Management Group. However,
in case both solicited as well as unsolicited ratings of eligible ECAIs are
available, the solicited ratings shall be used.
• It will also be ensured that external assessments for one entity within a
corporate group cannot be used to risk weight other entities within the same
group. In case of multiple assessments for a particular claim made by the
ECAIs, guidelines set out in the SBP Basel II Framework will be followed.
Domestic currency ratings shall be used for exposures denominated in domestic
currency while foreign currency ratings to be used for foreign currency
exposures.
• In relation to assignment/ applicability of ratings to short-term and long-term

claims, the bank shall use:
o Short-term issue specific/ issuer ratings for short-term claims of the bank
for the counterparties prescribed by the SBP Basel II Framework i.e. banks
(local & foreign) and corporates (with certain prescribed restrictions).
o Long-term issue specific ratings for claims which are investment in such
issues
o Long-term issue specific or issuer ratings i.e. high and low quality credit/
issuer assessment, for unrated claims (claims which are not an investment
in rated issues) satisfying certain criteria as prescribed under SBP Basel II
Framework
• In respect of exposures abroad, the bank will use the ratings assigned by ECAIs
recognised by the respective supervisors of the jurisdiction.
51
• In case of multiple assessments, if there are two assessments by ECAIs chosen

which map into different risk weights, higher risk weight will be applied. If there
are three or more assessments with different risk weights, the assessments
corresponding to the two lowest assessments should be referred to and the
higher of these two risk weights will be applied.
• No additional recognition of risk mitigant will be allowed in respect of claims for

which issue specific rating will be used.
• The frequency for external ratings to be obtained shall be annual.
For further details on use of external ratings, please refer to Section 2.3 – Use of
Ratings of SBP Basel-II Framework
Mapping of Ratings Scales of ECAIs with SBP Rating Grades

Two tables (Long-Term and Short-Term) providing mappings between SBP Rating
Grades and rating Scales of various ECAIs as mentioned above as prescribed by the
State Bank of Pakistan are produced below.
Long Term Rating Grades Mapping:
SBP Rating PACRA JCR-VIS Fitch Moody’s S&P

Grade
1 AAA AAA AAA Aaa AAA
AA+ AA+ AA+ Aa1 AA+
AA AA AA Aa2 AA
AA- AA- AA- Aa3 AA-
2 A+ A+ A+ A1 A+
A A A A2 A
A- A- A- A3 A-
3 BBB+ BBB+ BBB+ Baa1 BBB+
BBB BBB BBB Baa2 BBB
BBB- BBB- BBB- Baa3 BBB-
4 BB+ BB+ BB+ Ba1 BB+
BB BB BB Ba2 BB
BB- BB- BB- Ba3 BB-
5 B+ B+ B+ B1 B+
B B B B2 B
B- B- B- B3 B-
6 CCC+ and CCC+ and below CCC+ and Caa1 and CCC+ and
below below below below
Short Term Rating Grades Mapping:
SBP Rating PACRA JCR-VIS Fitch Moody’s S&P

Grade
S1 A-1 A-1 F1 P-1 A-1+, A-1
S2 A-2 A-2 F2 P-2 A-2
S3 A-3 A-3 F3 P-3 A-3
S4 Others Others Others Others Others
The bank will ensure that the relevant systems have necessary data fields/
capabilities to capture the external ratings so that the relevant information could
be retrieved into capital calculator and risk weights assigned based on such
ratings. The above-mentioned tables shall be duly incorporated in the capital
52
calculator so that assignment of risk weights can be duly automated.
The business units will also be required to capture all publicly available
(unsolicited) and/ or solicited ratings made by SBP approved ECAIs into the
systems while the data shall be subject to validation by CRMD in accordance with a
mechanism set out in section 2.2 of this Handbook.
Credit Risk Mitigation (CRM)
• Where an exposure is secured by eligible collateral that meets the prescribed

criteria and minimum requirements, banks are allowed to reduce their exposure
under that particular transaction by taking into account the risk mitigating
effect of the collateral for the calculation of capital requirement.
In this regard there are two approaches: i) Simple Approach; and ii)
Comprehensive Approach.
Under the Standardized Approach, the bank has exercised the option of using
Simple Approach for CRM whereby limited financial collaterals are available for
capital relief. The bank is in the process of acquiring a Collateral Management
System (CMS) which is expected to be in place in the future and to be used
going forward when the bank would be performing parallel run under the FIRB
Approach (alongside performing Standardized Approach capital calculations)
when additional requirements of the Comprehensive Approach to CRM would
become applicable.
The data requirement for the simple approach to CRM shall be met by CRMIS
and Capital Calculator.
Under the simple approach to CRM, in case the risk weight of the counterparty
is higher than the risk weight of the available eligible collateral10, the risk weight
of eligible collateral replaces the risk weight of the counterparty in whole or in
part provided that there is no currency or maturity mismatch11 between the
exposure and the collateral. The risk weight on the collateralized portion is
subject to a floor of 20%. The remainder of the claim is assigned the risk weight
of the counterparty. The 20% floor for the risk weight of collateralized portion is
relaxable up to 0% provided that the exposure and the collateral are
denominated in the same currency, and the collateral is either cash / deposit
receipt or is in the form of Sovereign / PSE securities eligible for a 0% risk
weight, and its market value has been discounted by 20%.
For further details, please refer Section 2.6 – Credit Risk Mitigation of SBP
Basel-II Framework.
• Where guarantees or credit derivatives are direct, explicit, irrevocable and

unconditional, and the banks fulfil certain minimum operational conditions
relating to risk management processes outlined in the SBP Basel-II Framework,
10 Eligible collateral for CRM under Simple Approach is covered in detail in the Chapter on Collateral
Management Guidelines
11 Simplified Standardized Approach criteria as detailed in the SBP Basel-II Framework
53
they may take into account benefit of such credit protection in calculating
capital requirements.
A range of guarantors and protection providers is recognized. A substitution

approach is applicable. Thus only guarantees issued by or protection provided
by entities with a lower risk weight than the counterparty leads to reduced
capital charges since the protected portion of the counterparty exposure is
assigned the risk weight of the guarantor or protection provider, whereas the
uncovered portion retains the risk weight of the underlying counterparty.
For further details, please refer Section 2.6 – Credit Risk Mitigation of SBP
Basel-II Framework.
Capital Charge Calculation
Capital Charge = Risk Weighted Assets (RWA) X 8% (minimum)
For non-collateralized transactions, RWA is calculated by multiplying the exposure

amounts with the relevant Risk Weights of the counterparties.
For collateralized transactions, RWA is the sum of non-collateralized and

collateralized RWAs; where non-collateralized RWA is calculated in the same
manner as detailed above and collateralized RWA is calculated by multiplying the
exposure amounts with the relevant Risk Weights of collaterals subject to certain
conditions set out in Section 2.6 – Credit Risk Mitigation of the SBP Basel-II
Framework.
Example
A term loan of PKR 100M to a Corporate - Large rated BBB+ secured against
shares of a company listed on KSE rated AA with a first draw-down of PKR 60M
and second draw-down of PKR 40M after six months.
Limit O/S Un-utilized Committed Collateral Total Risk Weighted Required

Exposure Asset Capital
Basel-I Scenario - Risk Weighted Assets calculated on the basis of type of exposure by a
predetermined %age. No mitigation available due to collateral except for Cash and Govt. Guarantees.
Only O/S amount is relevant for the purposes of ascertaining exposure amount.
100M 60M 40M 40M 120M 60M 100% 4.80M
Basel-II Scenario (with Collateral info) - as per Standardized Approach RWA calculated on the basis of
Borrower Asset Class. Mitigation due to Deposit (COD/TDR, etc.), Gold, Debt and Equity Securities,
Units of Mutual Funds, Guarantees is allowed subject to certain conditions, i.e. capturing details of
collateral, legal enforceability, etc. RW of Counterparty can be replaced by RW of Collateral.
100M 60M 40M 40M 120M 100M 20% 1.09M
O/S + RW of
Committed Counterparty is
100% and RW of
Collateral is 20%
Basel II Scenario (without Collateral info)

100M 60M 40M 40M 120M 100M 100% 5.44M
54
Credit Handbook
Section 2
Appendices
55
Appendix-I to Chapter 2.2
Framework for assignment of unique customer ID
The unique Customer ID (CID) would be assigned on the basis of following

parameters:
• For individuals:
o CNIC No.
o In cases where CNIC is not available, old NIC No. However, the bank will
endeavour to seek information of CNIC so that the same can be
consistently used across the bank as the standard unique CID for
individuals).
o Passport No. only in exceptional cases where both CNIC No. and old NIC
No. are not available e.g., foreign individuals.
• For other asset classes:

o SBP Borrower Code
o NTN (National Tax No.)
o SECP Registration No.
• Name of Client: This identifier shall be used only in exceptional cases where the
bank does not have any of the above-mentioned information available for the
related asset classes (potentially in the cases of sovereigns and PSEs etc.).
General Procedure
CNIC No. (Old NIC No. in cases where CNIC is not available) shall be used where
the Constitution Type is Individual, Sole Proprietorship or Un-registered
Partnership.
• NTN will be used for registered partnerships and other Private Sector entities.
SBP Borrower Code/ SECP registration will also be checked (if available) for
data consistency.
• For foreign individuals their Passport No. will be the basis.
• The client name will be used in such cases where CNIC/NIC, NTN, SECP
Registration No. etc. are not available. This is most common in the case of
Federal and Provincial Government entities and Local Bodies. Due diligence and
care will have to be exercised by the data entry personnel in such cases to avoid
any complications in accurate exposure aggregation applying “client name” as
unique CID for exposure aggregation.
• The bank’s source systems will have appropriate data fields to record such
standardised customer identifiers so that consistency in exposure aggregation
can be maintained across such systems. The responsibility for entering data in
such fields shall rest with the business units while data integrity in case of
CRMIS shall be reviewed by dedicated MIS Officers within CRRS (For details of
such data validation structure/ mechanism, please refer to paragraphs detailing
exposure aggregation process).
• With respect to exposures captured in CRMIS, system will generate and assign a
unique customer ID to each client based on the above criteria.
56
Appendix-II to Chapter 2.2
Framework for assignment of Group ID (GID)
There will be two tags one will show grouping on the basis of SBP criteria and the
other will show grouping on the basis of internal MCB criteria. Provision shall be
there for assigning multiple Parent IDs to a single entity. This will cater for any
kind of complex grouping structure. The structure in tabular form is given below:
Customer Customer Parent Group Group Basis of

ID Name ID ID Name Grouping*
* SBP and/or Internal
The last field ‘Basis for Grouping’ will be a text field containing an explanation for
underlying basis for grouping.
The operational details in relation to CRMIS, including the description of system

features/ specifications, system/ data flows together with related controls etc. will
be covered in CRMIS documentation
57
Appendix I to Chapter 2.3
Industry Study Guidelines
Some of the suggested topics that are required to be covered while compiling
industry studies include the following.
Background, Importance and Scope
Topics to be covered include the following:
• Industry importance / contribution to overall economy of the country
• Industry structure and number of companies operating
• Total annual sales, production, imports, exports and other relevant statistical
data
• Short to medium term financial performance (historical and expected trends)
• Industry growth trends / forecasts
• Industry viability / competitiveness in a regional / global framework
• Peer group analysis
Competition (from other Financial Institutions)
The analyst will need to make an assessment of other banks / FIs activities within
the target industry. This should include number and depth of individual
relationships, areas of product competence, target niches / products and credit
appetite. The objective here is to identify the level of competition that will be faced
when serving this industry and potential in terms of untapped niches.
Industry Financial Benchmarks and Critical Success Factors
The detailed industry study, apart from other things, will enable the analyst to
identify minimum financial benchmarks and critical success factors applicable to
the particular industry being analysed. Existing and potential customers in the
industry can be screened against these objective measures to determine their
acceptability or otherwise.
Industry Analysis
A list of the points that should be considered in an industry analysis is provided

below.
• Market Analysis
o Nature of Products /Services
o Demand – Supply Situation
o Sales Pattern
o Any other factor
• Distribution Channels
58
• Buyer / Supplier Analysis
• Competition
o Production Capacity
o Market Share
o Barriers to Entry
o Barriers to Exit
o Any other factor
• Industry Financial Performance

o Sales growth rate
o Gross margin
o Net margin
o Current ratio
o Gearing ratio
o Interest coverage ratio
o Days receivable, payable, inventory
o Any other factor
• Regulatory Environment
o Import / Export duties
o Financing schemes
o Tax exemptions
o Any other factor
59
60
Format for Corporate - Commercial CRR
Customer Branch
Score Weightage
1. Equity Base
Over Rs.100M 100 10%
Rs.51M - Rs.100M 80
Rs.21M - Rs.50M 50
Rs.5M - Rs.20M 40
Below Rs.5M 00
2. Profitability (50% of the earned score if financials are un-audited)
Profitability for the last 3 Years (With improving trend) 100 10%
Profitability for the last 3 Years (Without improving trend) 80
Profitability in the last 1 Year only 50
Loss in the last 1 Year 00
3. Ownership Structure
Public Limited Company (Listed) 100 10%
Public Limited Company (Un-Listed) 70
Private Limited Company 50
Partnership / Proprietorship / Other 30
Personal Account 00
4. Relationship
Client over 10 Years 100 10%
Client 5 – 10 Years 70
Client 1 – 5 Years 30
New Client (less than 1 Year) 00
5. Security (For Total Facility) - Please refer the Security Class List
Class-I 100 20%
Class-II 70
Class-III 50
Class-IV 30
Class-V 00
6. Prudential Compliance / eCIB Report (including Group Companies)
Current Ratio Yes 100 5%
No 00
F.B. Borrowing, 4 ¯ Equity or Less Yes 100 5%
No 00
Total Borrowings, 10 ¯ Equity or Less Yes 100 5%
No 00
eCIB Report (Overdues) No 100 5%
Yes 00
Yes (Over 1 Year) -100
7. Mark-up / Repayments Overdues
None 00 20%
Exceeding 45 Days -25
Exceeding 1 Year -300
Exceeding 2 Years -400
8. Restructuring in the past 5 years
No 00 20%
Yes / One -100
Yes / Two -200
9. Security / Documentation Shortfalls
No 00 10%
Yes -100
10. Negative Comments by Internal, External, SBP Auditors / CRC
No 00 10%
Yes -100
Total Score
Assigned Rating
61
Risk Rating Total Score

1 Above 69
2 Between 58 and 68
3 Between 47 and 57
4 Between 26 and 46
5 Between 5 and 25
6 Below 5
7 Regulatory Classification
Name & Signatures of Initiating Official Name & Counter-Signatures of CO/ SCO
62
Corporate - Commercial Security Class List for CRR
Class-I Lien on PKR / FCY Deposits with MCB / other Banks (in case of other Banks, prior
allocation from FID required)
Registered: CDNS Securities (DSCs, SSCs, etc.) / other Govt. Securities / Bonds
Class-II Pledge of Shares / TFCs (for TFCs, compliance with SBP PR criteria to be ensured)
Bearer Bonds
Financial Guarantees from local / foreign Banks (prior allocation from FID required)
Class-III Discounting / Finance against clean export documents drawn against LCs of Top
1,000 Int'l Banks
IBP against authenticated acceptance of LC opening bank (prior allocation from FID
required)
Class-IV Pledge of local / imported raw material / goods

Lien on import documents under LC (Sight / DA - with pledge arrangement) for raw
material (net of Cash Margin, if any, which would qualify as Class-I above)
IBP against clean documents drawn under LCs of other Banks (prior allocation from
FID required)
Discounting / Finance against clean export documents drawn against LCs of Int'l
Banks other than Top 1,000 with prior allocation from FID
Class-V Hypothecation of raw material / goods / machinery

Finance against Contracts / discrepant documents drawn against LCs
Duly accepted Bills of Exchange
Trust Receipts
Mortgage of commercial / residential / agricultural real estate (held as sole security)
Lien on import documents under LC - Other than raw material (net of Cash Margin, if
any, which would qualify as Class-I above)
All others
63
64
65
Appendix II to Chapter 2.6
SBP Risk Weights for Balance Sheet Exposures

The risk weights for on balance-sheet exposures, as set by SBP, are as under.
Exposure Type External Risk

Rating Weight
a Cash and Cash Equivalents 0%
b Claims on Government of Pakistan (federal or provincial governments) and SBP, denominated in PKR. 0%
c Foreign Currency claims on SBP arising out of statutory obligations of banks in Pakistan 0%
d Claims on other sovereigns and on Government of Pakistan or provincial governments or SBP denominated in 1 0%
currencies other than PKR. 2 20%
3 50%
4,5 100%
6 150%
Unrated 100%
e Claims on Bank for International Settlements, International Monetary Fund, European Central Bank, and European 0%
Community
f Claims on Multilateral Development Banks 1 20%
2,3 50%
4,5 100%
6 150%
Unrated 50%
g Claims on Public Sector Entities in Pakistan 1 20%
2,3 50%
4,5 100%
6 150%
Unrated 50%
h Claims on Banks 1 20%
2,3 50%
4,5 100%
6 150%
Unrated 50%
i Claims, denominated in foreign currency, on banks with original maturity of 3 months or less 1,2,3 20%
4,5 50%
6 150%
Unrated 20%
j Claims on banks with original maturity of 3 months or less denominated in PKR. and funded in PKR. 20%
k Claims on Corporates (excluding equity exposures) 1 20%
2 50%
3,4 100%
5,6 150%
Unrated 100%
l Claims categorized as retail portfolio 75%
m Claims fully secured by residential property (Residential Mortgage Finance as defined in SBP’s Basel-II Guidelines) 35%
n Past Due loans:
1. The unsecured portion of any claim (other than loans and claims secured against eligible residential mortgages as
defined in SBP’s Basel-II Guidelines) that is past due for more than 90 days and/or impaired will attract risk weight
as follows:
• where specific provisions are less than 20 per cent of the outstanding amount of the past due claim; 150%
• where specific provisions are no less than 20 per cent of the outstanding amount of the past due claim; 100%
• where specific provisions are more than 50 per cent of the outstanding amount of the past due claim. 50%
2. Loans and claims fully secured against eligible residential mortgages that are past due for more than 90 days 100%
and/or impaired
3. Loans and claims fully secured against eligible residential mortgage that are past due by 90 days and /or impaired 50%
and specific provision held there-against is more than 20% of outstanding amount
o Listed equity investments and regulatory capital instruments issued by other banks (other than those deducted from 100%
capital) held in banking book
p Unlisted equity investments (other than those deducted from capital) held in banking book 150%
q Investments in venture capital 150%
r Investments in premises, plant and equipment and all other fixed assets 100%
s Claims on all fixed assets under operating lease 100%
t All other assets 100%
66
• Off Balance-Sheet Exposures
The total risk weighted assets with respect to credit risk of OBS (off balance-
sheet) exposures is the sum of risk-weighted assets for market related and non-
market related OBS transactions.
The market related transactions include i) interest rate contracts, ii) foreign
exchange contracts, iii) equity contracts, and iv) other market related contracts.
The non-market related off balance-sheet exposures includes direct credit

substitutes, trade and performance related contingent items and other
commitments. The risk weighted amount is calculated by multiplying the
notional amount by CCF (Credit Conversion Factor) to convert into on balance-
sheet equivalent and then multiplying the resultant figures with the appropriate
risk weight of the counterparty.
Nature of transaction Credit

Conversion
Factor (CCF)
Direct credit substitutes 100%
Any irrevocable off-balance sheet obligation which carries the same credit risk as a direct
extension of credit, such as an undertaking to make a payment to a third party in the
event that a counterparty fails to meet a financial obligation or an undertaking to a
counterparty to acquire a potential claim on another party in the event of default by that
party, constitutes a direct credit substitute (i.e. the risk of loss depends on the
creditworthiness of the counterparty or the party against whom a potential claim is
acquired). This includes potential credit exposures arising from the issue of guarantees
and credit derivatives (selling credit protection), confirmation of letters of credit, issue of
standby letters of credit serving as financial guarantees for loans, acceptances on trade
bills, securities and any other financial liabilities, and bills endorsed under bill
endorsement lines (but which are not accepted by, or have the prior endorsement of,
another bank).
Performance-related contingencies 50%
Contingent liabilities, which involve an irrevocable obligation to pay a third party in the
event that counterparty fails to fulfil or perform a contractual non-monetary obligation,
such as delivery of goods by a specified date etc. (i.e. the risk of loss depends on a future
event which need not necessarily be related to the creditworthiness of the counterparty
involved). This includes issue of performance bonds, bid bonds, warranties, indemnities,
and standby letters of credit in relation to a non-monetary obligation of counterparty under
a particular transaction.
Trade-related contingencies 20%
Contingent liabilities arising from trade-related obligations, which are secured against an
underlying shipment of goods for both issuing and confirming bank. This includes
documentary letters of credit issued, shipping guarantees issued and any other trade-
related contingencies.
Lending of securities or posting of securities as collateral 100%
The lending or posting of securities as collateral by banks. This includes
repurchase/reverse repurchase agreements and securities lending/borrowing transaction.
Other commitments
(a) Commitments with certain drawdown. 100%
(b) Commitments (e.g. undrawn formal standby facilities and credit lines) with an original
maturity of:
(i) one year or less. 20%
(ii) over one year. 50%
(c) Commitments that can be unconditionally cancelled at any time without notice (e.g. 0%
undrawn overdraft and credit card facilities providing that any outstanding unused
balance is subject to review at least annually) or effectively provide for automatic
cancellation due to deterioration in a borrower’s creditworthiness.
The credit risk on off balance-sheet market-related transactions is the cost to

the bank of replacing the cash flow specified by the contract in the event of
counterparty default. This will depend, among other things, on the maturity of
the contract and on the volatility of rates underlying that type of instrument.
67
The Credit Equivalent Amount (CEA) can be determined by the following two
methods.
• Current exposure or original exposure method (with prior approval of SBP) in

case of interest rate and foreign exchange contracts
• Current exposure method in all other cases
For further details; please refer Section 2.5 – Risk Weights Off Balance-Sheet
Exposures of SBP Basel-II Framework.
68
Credit Handbook
Section 3
Credit Process
69
Section 3
Credit Process
3.1 Credit Approval / Review Authority
3.2 Credit Investigation &File Maintenance
3.3 Credit Proposal
3.4 Credit Pricing
3.5 Credit Approval and Facility
Acceptance Processes
3.6 Product Program Manual Framework
70
3.1 Credit Approval/ Review

Authority
3.1.1 Introduction
3.1.2 Scope
3.1.3 Philosophy
3.1.4 Credit Approval v/s Credit Review
3.1.5 Post-Fact/ ‘As Done’ Credit Approvals
3.1.6 Hindsight Review
71
3.1.1 Introduction
This section delineates the Bank’s credit authority delegation process which forms
a part of the overall credit process of the Bank. Credit authority is delegated to
officers/executives with the necessary experience, judgment and integrity to
properly evaluate the risks and rewards involved in the approval and review of
credit transactions.
Regulatory Requirements
State Bank of Pakistan circular on Corporate Governance within Banks12provides
guidance on credit approval / review policy of banks. Following key areas have
been kept under consideration while preparing this policy:
a) Risk Management should be responsible for the independent review of the
Credit Approval Process.
b) The Board of Directors should not be involved in day to day activities
involving credit review or approval.
3.1.2 Scope
This section is applicable to all lending activity in the bank that is not governed
under program lending.
3.1.3 Philosophy
Individuals not offices will be given credit approval / review limits. The authority
delegation process would include assessment of the individual through a formal
testing process (Credit Skills Assessment Test by OMEGA or in-house developed
tests), personal evaluation and interview. Details in this regard shall be issued
through CRMD circulars from time to time.
In line with SBP regulations on the subject, there are two streams of Credit
authority:
a) Credit Approval Authority; and
b) Credit Review Authority.
Credit Approval Authority is vested in the Business Groups, while Credit Review
Authority is vested in Risk Management Group. The underlying theme for such
separation is that the business or risk taking units process the Credit Approval,
while the Risk Management Group reviews the same on pre-fact basis. Risk
Management Group does not have any revenue goals; therefore its review is
completely independent, as the Risk Management Group’s reporting line is
independent (to Risk Management & Portfolio Review Committee).
Four Eyes Principle

Four eyes principle would be implemented for all credit approval levels. Credit
proposals should not be approved without the formal consent of at least two
authorized individuals i.e. one having Credit Approval Authority and other having
Credit Review Authority.
12 BPRD Circular No. 03 dated 23.04.2007
72
Credit Approval authority holders will not be allowed to carry out transactions
within their limits without obtaining prior sign-off from the relevant Credit Review
authority, respectively. Such actions shall be deemed Post-Facto and be dealt with
as per Post Facto policy.
3.1.4 Credit Approval v/s Credit Review
• Credit Approvals will be processed by the Business Units taking the risk.
• All approvals require Review Sign-off prior to becoming effective.
• As per international best practices, the bank intends to institutionalize a

procedure for resolution of disputes between Credit Approval and Review
authorities, if any. On an exceptional basis, in the event of an un-resolved
difference of opinion between Credit Approval and Credit Review authority,
the issue would be elevated to the next higher level of Review Authority13.
• The reporting line of the review organisation is independent of the business

units as this function reports to the Group Head Risk Management who in
turns reports functionally to the Risk Management & Portfolio Review
Committee of the Board of Directors. The ultimate Review Authority is
Management Credit Committee (MCC). No approvals will be communicated
to customers until the relevant review authority has signed-off. Any
conditions imposed by the relevant review authority will over-ride the
approval given by the business.
Delegation of Approval / Review Authority to Individuals
The Board of Directors shall advise the credit approval / review authority of the
MCC and the same shall be unlimited (subject to regulatory requirements).
Approval / Review structure and powers, including amendments, at various levels
below MCC shall be decided by MCC. Credit approval/review powers at various
levels shall be communicated through RMG circulars.
3.1.5 Post Facto / ‘As Done’ Credit Approval
“Any action in violation of approval/review terms or Credit Handbook will constitute

post-facto. As a policy matter, Post Fact credit approvals are discouraged and shall
only be allowed as exceptions requiring adequate recording of the reason(s) for
allowing such exceptions.”
Post Fact credit approvals are required when initial approval is not obtained from
competent authority before the excess drawings / violation of approval terms / the
Credit Handbook or credit portfolio strategy.
If expired facilities are allowed for usage without obtaining extension from
competent authority, and outstanding are not frozen, this action will be deemed to
be “post-facto” at the time of renewal. In the event the business feels that they are
13 However, it cannot jump a level. Any “jumping” of levels will be reported to RMPRC.
73
unable to meet a particular term of approval on a timely basis, then the time to
raise the issue is at the time of approval rather than the next annual renewal.
All post facto approvals are required to be approved/ reviewed at the original
approval/ review level. Post Fact approvals should be obtained as soon as post fact
action is detected. Any post fact transaction detected by CRCD shall be reported to
concerned branch by CRCD, CRCD shall have the authority to block limits if post
fact approval is not obtained within 60 days from date on which same was
conveyed to Branch by CRCD.
Details of all Post facto/ as done cases must be reported to SCO for review on
monthly basis. The submission shall include relevant details of the transaction,
reasons for allowing the transaction and the names of the involved field officials.
Post-Fact approvals detected by Credit Review division shall also be reported to
relevant SCO. It shall be the responsibility of the relevant SCO/Division Head
Credit Review to report Post Fact transactions to Group Head RMG on monthly
basis. SCO / Division Head Credit Review may report individual transactions to GH
RMG keeping in view the severity of breach of credit discipline. GH RMG shall have
the authority to recommend further action on such instances. Group Head RMG
shall identify and report Post-Fact approvals involving a material breach of credit
discipline to the President, Relevant Business Group Head and HR on quarterly
basis.
Post-Fact approvals shall not result in an automatic suspension of the credit

powers of relevant officials. President shall be the final authority to take a decision
on suspension of powers or any other action deemed necessary.
3.1.6 Hindsight Review
A system of checks and balances has been instituted to ensure consistent

application of the bank’s credit policies. In this regard, a hindsight review process
is in place whereby proposals reviewed / approved at each review / approval level
are reviewed again at a higher level.
The procedure and guidelines for this process are circulated by CRMD from time to
time.
Implementation responsibility of this policy rests with each approval / review level
for the level below it.
74
3.2 Credit Investigation & File

Maintenance
3.2.1 Credit Files
3.2.2 Credit Investigation
3.2.2.1 Borrower’s Basic Fact Sheet
3.2.2.2 Credit Worthiness Report (Local)
3.2.2.3 Credit Information Bureau (eCIB)

Report
3.2.2.4 Call Report
3.2.2.5 Directors and Asset Charges

Search Report
3.2.2.6 Banker’s Report
3.2.2.7 Issuance of Banker’s Credit

Report
75
3.2.1 Credit Files
Credit files not only include all correspondence with the borrower but should also
contain sufficient information necessary to assess financial health of the borrower
and its repayment performance. The information should be filed in an organized
way for ease of review by all concerned. The business units would retain and
maintain credit files.
Confidentiality
The information contained in credit files includes information released to the Bank
by borrowers as a result of the lending relationship and may be of a confidential
nature. Accordingly, adequate controls need to be in place to restrict access to the
credit files for only those personnel who are authorised to use and maintain credit
files. Therefore, all credit files shall be placed in locked cupboards / cabinets with
access only to the authorised personnel. Under no circumstances should the files
be kept overnight by the CO/RM, in their desks/cabinets.
Guidelines for File Maintenance
The business units shall be required to maintain an appropriate credit file for each
borrowing client. Proper filing of credit related material is essential to ensure that
required information is easily accessible and maintained in good order.
Organisation and Retention
Given below, are the various sections in a standard credit file and the retention
period of various documents. The retention period pertains only to the current file;
record removed from the credit file would be placed in archives and is not to be
destroyed.
All record to be arranged in chronological order with latest coming first.
File Section Retention Period
SECTION – 1 Approvals
1 Year for working capital and till full

Approvals / Minutes / Sanction Advice
adjustment for term loans.
Approval for PR relaxation from SBP 2 years
1 Year for working capital and till full

Approving Authorities Comments
adjustment for term loans
Credit Proposal/ Basic Fact Sheet / Credit

1 year for working capital and till full
Worthiness Report/ Group Summary Sheet
adjustment for term loans
/Credit memos
Approved Remedial Plans / Restructuring /

1 year
Earmarking / deferrals
76
Classification / watch listing 1 year
SECTION – 2 Security
Documentation checklist 1 year

Documentation review / Security Check List /
Need basis (Min. 3 year)
Legal Opinion / Valuation of Fixed Assets.
SECTION – 3
BIR / Call Reports / Site Visits / Facility
Last twelve months
Advice Letter (copy only)
SECTION – 4 Correspondence
Client correspondence / Internal
Correspondence / SBP Correspondence / Lega Need basis
Correspondence
SECTION – 5 Reports
SBP eCIB Report Need basis (Min. 1 Year)
Bank Credit Report Need basis (Min. 1 Year)
Audit Comments Need basis (Min. 1 Year)
Stock Inspection Report / Stock Statement 1 Year
Press Clipping 1 Year
Search Reports 1 year
SECTION – 6 Financials
Financial spreads 1 Year
Interim financials 1 Year
NOTE: For all Term Loans, the related documents are required to be retained in the
file till full and final adjustment.
77
3.2.2 Credit Investigation
Knowledge of a customer’s creditworthiness is essential before taking any lending

decisions and also helps to minimize the risk of default. Such information is
required at all times, especially at inception/ renewal of credit facilities and is to be
monitored continuously during the course of the banking relationship.
The ambit of credit investigation is pervasive, covering not only specific financial
information about the existing / potential customer but also non-financial data,
such as business / marketing strategy, management quality, technology employed,
etc. In addition, information should also be obtained about the industry,
competitors, customers, suppliers and regulatory and economic environment as
these factors can significantly impact the creditworthiness of a customer.
The State Bank of Pakistan, realising the vital importance of such information, has
also laid down the minimum requirements before making lending decisions such
as the Credit Information Bureau Report and Borrower’s Basic Fact Sheet. There
can be no one source that could provide all such information as accumulation of
market intelligence is a time consuming process and requires access to varied
information sources.
This chapter explains the information needs for credit investigation. The subject
matter being of paramount importance requires careful attention at all levels.
This section covers the following:
• Borrower’s Basic Fact Sheet

• Credit Worthiness Report (Local)
• Credit Information Bureau (eCIB) Report
• Call Report
• Directors Search And Charges Search Reports
• Banker’s Report
Forms and guidelines for compiling these reports are provided in the attached
Appendices.
3.2.2.1 Borrower’s Basic Fact Sheet
Requirement: It is a regulatory requirement of the State Bank of Pakistan.
Required for: As per Regulation # 3 (for Corporate & Commercial) and 8 (for SME)
Banks / DFIs shall not approve and / or provide any exposure
(including renewal, enhancement and rescheduling / restructuring)
until and unless the Loan Application Form (LAF) prescribed by the
banks / DFIs is accompanied by a ‘Borrower’s Basic Fact Sheet’ under
the seal and signature of the borrower as per approved format of the
State Bank of Pakistan
Purpose: To acquire basic information on the Borrower for initiation of a

relationship or monitoring after disbursement.
Prepared by: Borrower and countersigned by bank official. To be regularly obtained &
with each Loan Application or Renewal request.
78
The basic fact sheet provides minimum information, (such as the legal name,
address, details of ownership & their network, management financial limits etc.)
required for entertaining a credit relationship request and has been mandated by
SBP for Banks and Financial Institutions.
The collection and analysis of adequate information on the prospective borrowers

help in expeditious credit processing, minimising the risk of default and effective
monitoring after disbursement of funds.
Branches should ensure that BBFS and LAF should not be older than one month
from the date of credit proposal.
Thus Branches should ensure that Borrower’s Basic Fact Sheet (BBFS) is obtained
from all borrowers, and authenticated by a bank official who should places his/her
signature on last page and affix his/her initial on other pages of BBFS and shall
mention his / her name, designation and employee number in the space provided
for the counter signature.
The format prescribed for Borrower’s Basic Fact Sheet for corporate/ commercial/
SME and for individuals/ consumers are provided by SBP as part of prudential
regulations.
3.2.2.2 Creditworthiness Report (Local)
Requirement: At least once for every new relationship
Required for: All new local borrowers.
Purpose: To provide Credit Worthiness / Business Information Report on the

borrower.
Prepared by: 1) Any Officer of the proposing Branch for proposals below PKR.
5.000M.
2) Enlisted Credit Report Preparing Agency (CRPA) for exposures of
Rs.5.000 M and above. (Services of CRPA may also be utilized for
CPs within ‘1’ above if approved by G.M. & above).
NOTE: This is up to the discretion of Business Manager to arrange Credit Report

from enlisted Credit Report Preparing Agency in case the exposure is below PKR
5.000M
By Bank’s own officer:
Borrower’s Business Information/ Credit Worthiness report identifies the

applicant’s place of business, ownership pattern, latest history, operational
information, back ground of sponsors, banking information, overall net wealth and
resources, details of current investigations based on visit to borrower’s premises,
feedback from competitors and bankers, market reputation reports and the
standing of the customer’s etc.
While undertaking a credit investigation, the officer needs to focus on the 5 Cs of

credit (character, cash flows, collateral, capacity, competition). Additionally,
different sources of information have to be tapped including some of the following:
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• Interview with principals and / or key officials of subject company after visit to
the factory or place of business / office.
• Trade supplier’s feedback on payment by the subject.
• Knowledge of competitors.
• Financial statements of accounts / Balance Sheet.
• Bank’s own record.
• Market Report.
Suggested Format (Appendix I to Chapter 3.2) is attached.
By Credit Report Preparing Agency (CRPA):
In case of fresh borrowers where fund based and non-fund based facilities of PKR
5.000M and above are involved, branches shall send Request for Local Business
Information/ Credit Worthiness Report / local credit report to enlisted CRPA.
In addition, the following reports may also be obtained from enlisted CRPA.
Market Reputation Check

These reports are prepared without contacting the borrower and are helpful
where credit information is required in respect of suppliers, customers and
general market reputation of client.
• SME Credit Report (detailed report)

This is a detailed report which provides general information, business
information, management structure and style. SME reports may be obtained in
cases where detailed credit information is required.
The CRPA credit worthiness report shall, as a minimum, cover the information
prescribed for such reports as prepared internally by the Bank.
In case of SME, effort should be made to obtain Credit Worthiness Report from
their respective associations as well.
In following cases credit worthiness report would not be required;

• All MNCs
• Corporate Large Customers (qualifying the criteria defined for Corporate
client)
• Relevant Business Group Head jointly with Credit Head of the respective Group
shall be authorized to waive the requirement on a case to case basis. Relevant
Business Group Head may delegate this authority at Business Head level if
deemed appropriate.
However the bank check has to be arranged by the concerned business units from
the existing bankers of MNCs and Corporate clients.
For all other customers following criteria should be used for obtaining the credit
reports;
Local Credit Reports PKR 5 M & above

SME Credit Report PKR 10 M & above
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Credit Worthiness shall also not be required in case Bank’s exposure on fresh
customer is secured against 100% cash collateral. In such cases, Branch Manager
/ Officer shall prepare the credit report as per format Appendix I to Chapter 3.2.
Detailed guidelines for obtaining these reports are provided in Chapter 5.6 of this
Handbook.
3.2.2.3 Credit Information Bureau (eCIB) Report
Requirement: It is a regulatory requirement under Prudential Regulation (PR)
Required for: While considering proposals for any exposure (including renewal,
enhancement and rescheduling / restructuring) exceeding such limit as
may be prescribed by State Bank of Pakistan from time to time, banks /
DFIs should give due weightage to the credit report relating to the
borrower and his group obtained from Credit Information Bureau (eCIB)
of State Bank of Pakistan. eCIB report shall be obtained for all sorts
of exposures irrespective of any amount. (Although SBP condition of
obtaining eCIB report is for exposure exceeding PKR 500,000/- after
netting-off the liquid assets held as security). It must also be ensured
that eCIB report at the time of approval/ disbursement should not be
older than one month. In case of credit proposal of a group concern,
eCIB of other group members companies should be obtained. For
processing of credit requests of Partnership concerns, eCIB of all
individual partners of a partnership concern shall also be obtained in
addition to eCIB of partnership concern (registered).
Purpose: To have a clear picture of total exposure of a borrower and group with
its present status from all Banks and Financial institutions.
Prepared by: Credit Information Bureau of the SBP on request.
Retention Period: Till receipt of next report and minimum of every 3 years.
SBP’s Credit Information Bureau
SBP has established a Credit Information Bureau with the purpose of making
available to Banks and Non-Banking Financial Institutions (NBFIs), on request, the
exposures and overdues of borrowers with Banks and NBFIs. This enables the
Banks and NBFIs to take into account the exposure of the borrowing enterprises or
group at the time of considering extension of Fund Based and Non-Fund Based
facilities. Prudence demands that Banks and NBFIs should not over expose
themselves to any borrower or group. As per Prudential Regulation, Banks’ are
required to give due weightage to eCIB report while considering any financing
proposal.
SBP has fully implemented the new system of eCIB from April, 2006, after running
it parallel with the old system for about a year.
After implementation of the new system, financial institutions are now generating
separate credit information report in respect of all consumer and corporate
borrowers irrespective of the size of outstanding amount of exposure.
Following two types of eCIB reports are provided by Credit Information Bureau:
• Corporate Credit Information Report
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• Consumer Credit Information Report
Corporate Credit Information Report

The aforesaid report provides credit information of the following borrowers (other
than individuals and sole proprietorships):
• Private Limited Companies

• Public Limited Companies-Unlisted
• Public Limited Companies-Listed
• Registered Partnership Concerns
The aforesaid report covers the following aspects:
Company Profile
Code
Name
Present Address
Previous Address
Consolidated Credit Exposure

Outstanding Liabilities
Fund Based
Non Fund Based
Amount under litigation
Writes Offs (During last five years)
Overdues
Past Due 90 Days
Past Due 365 Days
Date & amount of Recovery
No of times Rescheduling/ Restructuring during last five years.
Group Entities of the Borrower
Code
Name of Entity
Credit Enquiries
Enquiring Financial institute
Enquiry Date
Remarks
Consumer Credit Information Report

The aforesaid report provides credit information of the following borrowers:
• Sole Proprietorship concerns (in the name of Sole Proprietor)

• Individuals
The aforesaid report covers the following aspects:
Consumer Profile
Name
Father / Husband’s name
Gender
Date of Birth
Employed / Elf Employed Businessman / Professional
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NIC (Old & New)

NTN #
Passport #
Current & permanent Residential address
Name & Address of the employee business
Credit Details
Product
Term Loan / Evergreen Facility
Limit
Position date
Present balance
Minimum Amount Due
Overdues: 30, 60 & 90 days
Facility Date
Maturity renewal date
Secured / Unsecured
Security / Collateral
Credit History during last 12 months
Write Off
Date of Recovery of Written Off Amount
No of time account went into overdues by 30, 60 & 90 days.
No of time payments were made late by 15, 20, 29, & 30 days.
Credit Enquiries
Enquiring Financial Institution
Enquiry date
Remarks
Definition of overdue, default and group as per Credit Information Bureau is

appended below:-
• “Overdue” means any amount payable or owed by the customer to the Bank,
whether by way of Principal, mark-up or to meet obligations under any
instruments, which is delayed or in respect of which the maturity is past beyond
the period agreed between the Bank and the customer by 90 days up to a
maximum 364 days or which the bank has to per force incur to safeguard its
interest or fulfil its commitment and 90 days have elapsed since incurring such
payment.
• “Default” or “Due for 365 days or more” means any amount payable or owing by
the customer to the Bank, whether by way of principal, mark up or to meet
obligations under any instruments, which is delayed or in respect of which the
maturity is past beyond the period agreed between the Bank and the customer by
364 days and above or which the bank has to per force incur to safeguard its
interest or fulfil its commitment and 364 days have elapsed since incurring such
payment.
Business Units will send their request generated from the CRMIS data to CRRS on
the basis of which CRRS will arrange eCIB through an on line system .
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Confidentiality
As per State Bank of Pakistan’s BSD/SU-61/101/5886/2003 dated 14/11/2003

“All financial institutions are advised that the eCIB reports are meant for their
internal use and copies thereof should not be provided to third parties.
Furthermore, please also circulate necessary instructions among your
branches/concerned staff advising them that (i) credit reports should not be
disclosed to any party without prior written approval of SBP, and (ii) they should
not refer their clients to SBP but to facilitate and properly guide them, clearly
indicating to them as to which financial institution has reported their name as
defaulter, so that they can approach them accordingly”.
3.2.2.4 Call Report
Requirement: It is mandatory to prepare Call Report for regular clients with CRR
ranging from 1-4 after every two months and with CRR 5-6 on a monthly
basis.
Required for: All exposures for any amount where borrowers having continued
relationship or in cases of renewal of facilities.
Purpose: The purpose is to provide the latest information about business

performance and discuss issues and the financial arrangements and
needs of the customer.
Prepared by: It is prepared by Credit Officer / Relationship Manager or any Officer

calling upon the client after paying visit to office and factory and having
discussion with the concerned Executive(s)/ Director(s). The report must
be countersigned by his/her supervisor. The Officer, before visiting,
prepares a list of objectives of call/visit and seeks written approval of
Branch Manager/Chief Manager/ Unit Head / Corporate Head / Group
Head.
Retention Period: Till receipt of next report, minimum 3 years.
Call reports are prepared following site visit(s) of the client’s office and
factory/mortgaged assets where the client’s core business activities actually take
place. A call report should be prepared even after a telephone call provided the
discussion was material and is required to be documented.
As a general guideline a call report may cover the following items:

• Company’s latest operating performance (sales and profitability) not already
mentioned in the Credit Proposal.
• Industry situation
• Demand and Supply dynamics for the client’s and industry’s products and
services and inputs for services
• Future plans, etc., including potential requirements for incremental facilities.
• Current issues and problems in the account.
• Information on competitor’s strengths and weaknesses.
• New projects expected to come on stream in the customer’s business.
• Any other issue needing urgent attention.
• Comments on any issue mentioned in the last Credit Proposal.
• Regulatory and taxation changes and their impact such as General Sales Tax,
Import duties etc.
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• Current economic environment and its impact on the company’s performance.
The suggested format for Call Report is enclosed (Appendix II to Chapter 3.2).
Please note that call report may be prepared on a free format capturing the
required information and can be disseminated through e-mails.
3.2.2.5 Directors and Asset Charges Search Report
Requirement: Directors search (Form-29) shall be obtained for fresh financing, renewal
and is also required when there is a change in directorship of the
company.
Charges Search to be obtained in case of financing to all limited

companies (fresh, renewal, enhancements etc.). These can be obtained
from the Office of Securities & Exchange Corporation of Pakistan.
Required for: All exposures on limited companies for Fund Based and Non Fund
Based facilities.
Purpose: To check the correct names of directors of the company and the total
charges created on the Asset of the companies by other Banks / FIs.
Prepared by: Enlisted companies after obtaining the desired information from SECP.
Retention Period: Till receipt of next report, minimum every 3 years.
Both Director’s Search & Charge Search of encumbrance of assets of limited

companies (both private & public) is a public record and available on application to
SECP on prescribed forms and payment of the required fee.
Form 29 / Form A of the company ordinance provides details of changes in

directorship and photocopies of these should be obtained from customers bearing
attestation of SECP’s office. Obtaining of charge search report is compulsory before
allowing any fresh financing / enhancement whether Fund based or non-fund
based. These are provided by SECP in chronological order in which various bank /
lenders get their charge registered at or get the same released. Assets Charge
reports from SECP need to be analysed date wise, asset-wise (Fixed & current etc.),
Bank-wise as well to ascertaining the status/ranking of our charge. Thereafter,
before allowing any financing facility to limited companies it should be ensured
that Banks charge for the desired asset Category with SECP has been registered,
after obtaining NOC from Senior Creditors, if applicable. Request for registration
of Fresh charge is filed on Form 10 along with copy of relevant security /
Hypothecation agreement letter and affidavit relating to documents / IBs
submitted. Whereas, request for Modification of Pari Passu charge are filed on
Form 16 along with relevant supplement security agreement / letter and affidavit
as per above.
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3.2.2.6 Banker’s Report
Requirement: To be initiated at least once for a new solicitation of PKR. 5.000 M and
above where a customer has banking relationships with other Banks /
Financial Institutions.
Required for: All fresh exposures for PKR. 5.000M and above or where felt necessary.
Purpose: To know their dealings and payment behaviour with other Banks.
Prepared by: To be obtained from other Banks.
Retention Period: Till receipt of next report , minimum every 3 years
For fresh borrowers applying for credit accommodation of Rs.5M and above,
Banker’s report must be obtained from their present as well as previous banks,
directly by branches.
The purpose of this report is to ascertain their credit worthiness and to know about
their dealings and payment behaviour with other banks. The suggested format for
obtaining Banker’s Report is enclosed (Appendix I to Chapter 3.2).
3.2.2.7 Issuance of Banker’s Credit Report
Where a branch receives a request from other bank asking for customer credit
report of any of its customer, the same can be issued on the format attached as
Appendix IV to Chapter 3.2).
The confidential credit report shall be issued by branch/ relationship manager,

countersigned by his/ her Regional/ Unit Head. This report shall be issued within
15 working days of receipt of request.
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3.3 Credit Proposal
3.3.1 Introduction
3.3.2 Objective
3.3.3 Initiation of Credit Proposal
3.3.4 Credit Proposal Package
3.3.5 Temporary / One-off Transactions: Short-

Form Credit Proposal
3.3.6 Approvals on E-mails
3.3.7 Earmarking of Limits
3.3.8 NOCs (No Objection Certificates)
3.3.9 Credit Risk Ratings
3.3.10 Prudential Regulations Checklist
3.3.11 Calculating Yield of Account
3.3.12 Credit Limit Review
3.3.13 Legal Documentation
3.3.14 Facility Advising Letter (FAL)/ Sanction

Advice (SA)
3.3.15 Financed Organization Type (FOT)
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3.3.1 Introduction
The Credit Proposal process is a key activity in the credit cycle. The concerned
branch’s marketing staff, normally the Credit Officer / Relationship / Branch
Manager, collates information on the existing / potential customer. The information
is compiled in a standard format, suitable for credit sanctioning authority to take
credit decisions. The credit initiation level shall determine the appropriate approval
/ review level for the proposal. However, credit review can change the proposed
level based on its interpretation of the credit approval / review policy.
3.3.2 Objective
The purpose of this chapter is to:
• Streamline the process flow of credit proposals for all customer categories;
• Formalize the process for collecting necessary information;
• Highlight when standard or abbreviated credit proposal is appropriate;
• Provide guidance for completing the credit proposal;
• Provide guidance for earmarking of credit limits;
• Provide guidance for issuing of NOCs; and
• Provide guidance for processing cases of excess over limit.
3.3.3 Initiation of Credit Proposal
A Credit Proposal (CP) should be initiated two months prior to expiry date of related
facilities by the initiating officer in case of existing customers and should reach the
relevant credit approval/review authority at least two to three weeks before expiry.
Before originating the CP, the initiating officer must ensure a detailed meeting with
the customer to ascertain the client’s banking requirements. Requirement must be
in line with the customer’s current business needs and resources. Such a meeting
will minimise interim requests for enhancement and / or changes in limits.
The following points must be considered for any renewal / fresh facility being
proposed:
• Ascertain the customer’s integrity as well as capacity and willingness for

repayment.
• Way out in the event of possible default.
• Extend credit only if the bank can understand and manage the risk.
• What type of funding is appropriate? What are the customer’s cash and
operating cycles?
• What is the purpose of borrowing? It should be in line with the customer’s
occupation / nature of business.
• The asset to be financed shall normally be held as primary security.
• The asset(s) (primary / secondary) offered to secure the finance should be
evaluated on the basis of the following:
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o Realizable and of stable value.

o Marketability / storability of goods offered as security.
o Unhindered access to security by the bank.
o Maturity of collateral, if any, should be equal to or more than the
validity of corresponding facility.
• The bank’s security position should normally not be inferior compared to any
other lenders for the same type of facility, i.e. if a bank has granted facilities to a
customer against a first charge, we must also have a first charge (ranking Pari
Passu) to be able to lend to the same customer.
• The value of security to provide acceptable margin to the exposure.
• Viability of industry and other matters that may adversely influence customer’s
performance.
• Where a customer has foreign trade limit(s), the mechanism for related Foreign
Exchange Booking Limit (FEBL) shall be followed.
• Funds must be utilized for productive purposes and not for speculative, un-
desirable activities such as hoarding.
The Branch Credit Officer / Relationship Manager before undertaking processing of

Credit Proposal, besides usual scrutiny, shall ensure the following:
• Relationship Manager/Branch shall arrange the LAF, BBFS and eCIB, review the
same, ensure completeness and forward these documents to concerned Credit
Approval/Review Authority along with credit proposal. The Relationship
Manger/Branch shall counter sign the BBFS along with his/her name. It must also
be ensured that each page of BBFS is duly signed by authorized signatory of the
borrower.
• In case of joint stock companies, the Bank holds a certified copy of the
Resolution passed by BOD of the company, which authorizes such borrowing
and offers security of the specified assets of the company.
• Borrowing powers of the company must be checked in Memorandum and
Articles of Association (in case of joint stock companies) and Partnership Deeds
(in case of partnerships).
• The Bank holds latest eCIB report, Local Credit Worthiness Report and Foreign
Buyer Report, as applicable.
• The Credit Officer/Relationship Manager has completed Call Report with respect
to visit of customer premises (factory and / or office) and property held as
security.
• The documentation of the securities held is complete and the relevant debtors
and stock report have been obtained.
• Search Report of Director and Charges on Assets is obtained and ensure that
their findings are acceptable to the Bank. All searches when completed should
be reviewed by the Branch Manager and Relationship Manager.
• Review the comments of Audit, SBP, and External Auditor and ensure that all
issues raised have been taken care of. If any issue remains un-resolved, these
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must be documented in the CP along-with action plan and timelines for

rectification.
• The purpose for which finance is being obtained is specified in loan application
and subsequently in Approval of Finance and Sanction Advice.
• While processing the credit proposal, the relevant Credit Review Authority shall also
review LAF, BBFS and eCIB and shall ensure that these documents are in order.
Credit Review Authority shall intimate concerned Relationship Manager/Branch for
any rectifications if required. Credit Review Authority shall ensure that eCIB is not
more than one month old at the time of approval.
• On receipt of Approval of Finance, the Relationship Manager/Branch shall forward

the documents (LAF, BBFS and eCIB Report) to CRC for their review and safe
custody.
• No disbursement shall be made till entire satisfaction of CRC regarding

completeness and accuracy of the documents i.e. LAF, BBFS, and eCIB.
3.3.4 Credit Proposal Package
All Credit Proposals including enhancements, reductions, annual reviews and other
requests affecting the facilities and/or their structure shall be prepared on Form
SF-86/ CP Package. The prescribed Form SF-86/ CP Package and its related
guidelines are circulated by CRMD, which shall be strictly adhered to and financing
shall not be allowed until and unless credit processing has been done on the
prescribed format. The formats of CP Package for Corporate Large Customers and
for Corporate Commercial customers along-with guidelines for completing the same
are enclosed as Appendix I and II to Chapter 3.3 respectively.
Furthermore, projected Cash-flow Statement (for the next 12 months in case of

working capital financing and up to the date of final repayment / expiry in case of
term facilities) with its assumptions recorded in writing and cash operating cycle of
the borrower must be analyzed in case of all customers. Efforts must also be made
to identify the drivers of borrower’s business and its risk mitigants.
NOTE: For Corporate Large Customers the prescribed Format of CP Package must
be used irrespective of the fact that CP is generated from WBG, CBBG or Islamic
Banking Group. For Corporate Commercial clients parked in WBG, the same
format prescribed for Corporate Large customers must also be used.
Financial Spreads are also required to be accompanied with the Credit Proposal of
following clients;
• Corporate Large (irrespective of the fact that CP is being originated from

WBG, CBBG or Islamic Banking Group)
• Corporate Commercial availing facilities from WBG.
For all group accounts, the Group Exposure Sheet (part of the CP Package) shall be
signed by the relevant GECP Corporate Head / General Manager. Credit Proposals
of all Group accounts should have the same expiry and must be elevated in one lot
to the relevant review authority.
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Details of all deposit accounts (both demand and time deposits) of borrowers /
prospective borrowers shall be provided with all Credit Proposals as per suggested
format Appendix III to Chapter 3.3.
Furthermore, all Credit proposals shall be accompanied by ‘Brief Client Setup

Sheet’ available in the report menu of CRMIS, as an integral part.
The Path to extract CRMIS report is as follows:

Reports------------> Brief Client Setup Sheet
The Brief Client Setup Sheet shall be duly signed by Credit Manager / Relationship
Manager and Branch Manager/ Unit Head, while relevant Credit Approval / Review
Authority shall verify / cross check the data fields of the report so as to ensure that
all fields are properly filled in.
3.3.5 Temporary / One-Off Transactions: Short Form Credit Proposal
In case of urgent need of a regular customer, it may be necessary to override the

elaborate requirements of Credit Proposal. In such cases, the short form Credit
Proposal may be used.
Such approvals must be taken on an exceptional basis only. In addition, under no

circumstances a temporary / one-off transaction is to be approved that would
violate the State Bank of Pakistan’s Prudential Regulations or any other regulatory
requirement.
Temporary / one-off transaction approvals may be obtained on Short Form Credit

Proposal, as per the format given in Credit Proposal – Temporary Accommodation
[Appendix IV to Chapter 3.3]. The approval process for temporary / one-off
transaction is the same as that for regular CPs.
3.3.6 Approvals on E-mails
The field is allowed to elevate urgent credit requests on email, and the credit
sanctioning authorities are also allowed to approve the same via email.
All requests on e-mails must, as a minimum, contain the following information:
• Complete details of the existing approved facilities, i.e. limit, present o/s,
pricing, margin, security, etc.;
• Group details and exposure; and
• Transaction details and rationale.
• Confirmation that all regulatory documents have been obtained i.e. Application
of Finance, BBFS (not required for consumer lending cases), eCIB (where
applicable) etc.
The originating units and relevant approval/ review authority shall maintain a
record of such approvals and requests in the form of hard copies. The hardcopies
retained on record should include complete chain of e-mails for future reference
and audit purpose.
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Branch/ Business Unit shall ensure that only urgent requests are forwarded to
relevant approval/ review authority through emails.
3.3.7 Earmarking of Limits
Introduction
At times, it may be convenient to accommodate an unanticipated / one-off request

from a customer for enhancement in a specific facility by sub-allocating or
earmarking of another facility without an increase in overall exposure to the
company / group.
Earmarking of facilities should, however, be treated as an exception, as excessive

use of this flexibility reflects poor facility structuring.
Earmarking at Business Group Head level is restricted under certain circumstances.

Relevant Business Group Head may allow earmarking of credit facilities in the following
scenarios:
• Shorter to longer maturity transactions (term loans shall not be allowed by

Business Group Head)
• Blocking of an existing limit for a fresh facility (earmarking of non-Fund based to
allow fund based facilities shall not be allowed by Business Group Head)
• Blocking the limits to allow availment in one of the group account (subject to no
over-dues in both group accounts and security documentation is complete as per
Legal Satisfaction, otherwise earmarking shall not be allowed by Business Group
Head) and cross-guarantee recourse is held (for limited liability companies,
Memorandum and Articles of Association of the relevant companies must
permit these arrangements).
• Period of proposed earmarking (for NFB facilities only) goes beyond expiry of
limits (issuance of financial guarantees favouring FIs shall not be allowed by
Business Group Head)
• For approval level beyond relevant Business Group Head, relevant Business
Group Head shall also be authorized to allow establishment of Deferred Payment
LCs under the approved limits of DA LCs.
Relevant Business Group Head may delegate this authority at Business Head level if
deemed appropriate. All other restrictions as mentioned above shall apply.
However, earmarking cannot be approved at Group Head’s level in the following

scenarios:
• Higher to inferior security position.

• Non-Fund based to fund based.
• Earmarking of a specifically approved facility (single transaction).
• Post-shipment for pre-shipment facilities.
Conditions
• The facility being earmarked is effective, i.e. all security or documentation is in
place or adequate documentation is taken for the proposed transaction. Also, all
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regulatory or other requirements for the transaction being executed should be

in place.
• No earmarking shall be allowed in classified accounts or in accounts where

there are overdues. If such earmarking is necessitated, the same would be
approved at the original approval level.
• Earmarking arrangement should not be more than 90 days for fund-based

facilities and for more than one transaction for non-fund based facilities. The
non-fund transaction may be allowed for more than 90 days provided the tenor
is not more than the tenor allowed for similar transaction in the already
approved lines, or tenor allowed under the Group Head’s CA/RA for similar
facilities, whichever is longer.
• Earmarking / interchange of limits under the aforesaid authority must be

processed on format prescribed as per attached Appendix V to Chapter 3.3, a
copy of which must be immediately forwarded to SCO’s Office for record.
Earmarking / interchange of limits requests are also allowed through emails, for
which free format can also be used.
Documentation Aspects
Earmarking / cross transfer of one limit to another within same legal entity or
between / among various units of a Group may warrant additional / supplemental
documentation or charge forms sign-off requirements.
1. Promissory Note (P.N.) Fresh or Supplement Promissory Note is required, where

there is increase in exposure over an approved limit or
Fresh limit is created by blocking another limit.
2. Mark-up Agreement / Letter of Lien Fresh or Supplement agreements with new re-purchase
price and/or schedule of items under our lien may be
necessary.
3. Property Documents Obtaining of fresh memorandum of deposit of title deeds
for further charge on existing security / property
documents, with charge forms required for mortgage
purposes or both.
4. Others (Where Necessary) Other Charge Forms, as may be necessary. Moreover,
where limits are interchanged between two legal entities
within a group, resolution to borrow and inter-unit
guarantee may be warranted besides right of set-off.
It is the responsibility of Branch Managers / Banking Units to ensure that required

Fresh / Supplement Charge Forms / Documents are obtained before allowing
earmarking. In case of any ambiguity / confusion, opinion from the in-house legal
department must be obtained and followed carefully.
3.3.8 NOCs (No Objection Certificates)
For financing the assets (current or fixed) of private & public limited (listed &
unlisted) companies, it is a mandatory requirement of Company’s Ordinance 1984
that lending institutions must create their encumbrance over the respective assets
via registering charge with Securities & Exchange Commission of Pakistan.
Sometimes the banks, prior to extending fresh facilities and registering of their
charge over assets of the Company, require a no objection certificate from the
existing charge holders. e.g.
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• Registering a charge ranking Pari Passu with the existing lenders.

• Registering an exclusive charge on specific assets.
Bank prior to acceding to the request of issuance of the NOC must ensure the
following:
• Our position is by no means diluted via issuance of the requested NOC.

• For any dilution the request must be accompanied by due justification.
• Prior clearance on the draft must be obtained from Legal Cell.
• Similar NOCs must be obtained from other lenders.
Format for the NOC request is attached as per Appendix VI to Chapter 3.3.
All NOCs issued to and received from other financial institutions are treated as a
“Security” and accordingly proper “Inward & Outward Register” should be
maintained at Branches and CRCD (for CRCD taken over branches) and copies of
all such NOCs are kept in safe custody along with other security / charge
documents in the concerned branches / CRCD.
3.3.9 Credit Risk Ratings
For details on the selection and use of Credit Risk Ratings of customers, please
refer the Chapter on External and Internal Credit Ratings in Section-2.
3.3.10 Prudential Regulations Checklist
State Bank of Pakistan’s Prudential Regulation checklist is required to be filled

before sanctioning of all approvals, whether normal or one-off / temporary. The
Prudential Regulation Compliance Checklist is enclosed as Appendix VII to Chapter
3.3.
3.3.11 Calculating Yield of Account
Yield / Profit on Fund-Based facilities is calculated and attached with all Credit
Proposals (CPs) involving concessional finance and for all funded exposure. A
format of Yield / Profitability Report of Borrowers is enclosed as Appendix VIII to
Chapter 3.3, which also shows the relevant calculations.
3.3.12 Credit Limit Review
Short Term Limits (For Working Capital Requirements)
All short term limits for working capital requirements (Revolving Limits) are
required to be renewed every twelve months.
In case of one-off (Terminating / Non Revolving) facility, expiry date may be

different from the annual CP expiry date. If such a facility is not fully settled or paid
on the expiry or due date, a CP should be proposed to regularise this facility.
Expiry date of this CP should generally not exceed the annual CP expiry date.
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For all Corporate-Large clients (for WBG and CBBG) the Credit Proposal of Working
Capital facilities must be accompanied by the Financial Spreads Model with at least
one year projections. This requirement for obtaining projections shall not be
applicable for commercial banks, insurance companies, leasing/ Modarba and
correspondent banks for short and long term facilities.
Long Term Limits
In all cases where long-term facilities are being availed by customers along-with
short-term / working-capital facilities, the annual review CPs for short-term /
working-capital facilities must include all long-term facilities for review.
In all cases where customers are availing only long-term facilities, CPs for only the
long-term facilities should invariably be put-up for annual review. This exercise will
inculcate discipline in risk rating review. In all such cases, the Credit Proposals
accompanied by revised projections for the remaining tenor of the long-term
facilities should be elevated up to the level of the Approval / Review Authority. The
term loan review should include a comparison of actual financial numbers with the
numbers projected at the time of requesting term loan along with comments on the
variance (whether positive or negative).
If a CP only has term facilities, its review date shall be in accordance with the
financials availability date.
CP Expiry Date
Expiry dates of CPs shall be fixed keeping in view the availability of latest financials
and seasonal requirements of the company. For companies having June as their
financial year-end, the ideal CP expiry date shall be November-December. For
companies having December as their financial year-end, the ideal CP expiry date
shall be May-June. However, all CPs shall also contain comments on the latest six-
monthly financials (operating performance and balance sheet condition) if the CP
expiry date and financial year-end have a gap of more than eight months. In such a
case the CP must also project the year-end sales and profitability figures for the
current year.
In case of non-availability of financials by the due date of CP submission, a CP

incorporating all other aspects (excluding only the latest financials) shall be
submitted on the basis of half yearly or quarterly financials with a short expiry date
(coinciding with the availability of financials). After receipt of latest financials,
regular Credit Proposal shall be initiated containing detailed financial analysis.
In no case should branches / units be allowed to continue with the expired limits
without approvals. In case any documentary requirement is lacking, a temporary
approval may be obtained before expiry of limits.
Business Units shall monitor the counterparty limits with specific reference to non-
utilisation of limits, at least on a quarterly basis. Such cases shall be taken with
the customers and appropriate actions must be taken e.g., reduction in limits or
marketing for availment of unutilised limits by the customers.
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3.3.13 Legal Documentation
MCB has standardised legal documentation (prepared by in-house / external legal

counsel) which the borrowers are required to execute before availing credit
facilities. Deviations, if any, shall be approved according to the following grid.
• For all credit facilities approved at levels below Group Head Risk Management,
such deviations shall be approved by Group Head Risk Management on the
recommendation of the relevant business Group Head.
• For facilities approved at Group Head RMG level and above, such deviations
shall be approved at the original approval/review level.
It is pertinent to mention here that all the documentation formalities mentioned in

the Credit Handbook has been finalized in consultation with LAD. Waiver may be
allowed on case to case basis, against due justification, keeping in view the risk
profile, track record and credit worthiness of the customer. Such requests for
waiver of legal and/ or security documentation formalities shall not be referred to
LAD for clarification/ opinion. These cases shall be elevated to the relevant
competent authority mentioned above for decision. It will be at the discretion of the
competent authority to refer these cases to LAD if deemed appropriate. The
justifications for proposing/ granting such waiver will be properly documented in
the credit proposal and approval of finance for record.
3.3.14 Facility Advising Letter (FAL)/ Sanction Advice (SA)
After issuance of Approval of Finance by the relevant Approval/ Review authority,

CRCD/ Branch Manager (where CRCD services are not available) shall issue the
FAL/ SA, detailed process is mentioned in section 3.5.
All approvals / sanction advices shall mandatorily contain the following condition with
regards to change in directorship:
‘During the tenancy of MCB’s exposure or financing arrangement, for any change in
directorship – prior consent in writing must be obtained from the Bank. Otherwise
MCB has right to recall the loan / exposure / financing arrangement immediately’.
Relevant Business Group Head has been authorized to waive this requirement on a
case to case basis (only for those out-going directors whose PG is not obtained as
security or has already been waived at appropriate level) keeping in view the risk profile
and track record of the customer. Relevant Business Group Head may delegate this
authority at Business Head level if deemed appropriate
The format in use at MCB is enclosed as Appendix-IX to Chapter 3.3.
3.3.15 Financed Organization Type (FOT)
All Credit Proposals, Approvals of Finance and CRMIS Reporting shall invariably
mention the Financed Organization Type (FOT). Definition of each FOT has already
been provided by SBP, however, the same is being elaborated hereunder in order to
clarify any ambiguity in this regard/ ensure correct reporting.
There are three FOTs in which the borrowers are categorized viz. Consumer, Small
and Medium Enterprise, Corporate / Commercial.
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1- Consumer:
Consumer means individuals who apply for financing to meet their personal, family
or household needs. The facilities categorized as consumer financing are Credit
Cards, Auto Loans, Housing Finance and Personal Loans (personal loans mean the
loans to individuals for the payment of goods, services and expenses and include
Running Finance / Revolving Credit to individuals for said purposes).
2- Small and Medium Enterprise (SME):

SME means an entity, ideally not a public limited company, which does not employ
more than 250 persons (if it is manufacturing / service concern) and 50 persons (if
it is trading concern) and also fulfills the following criteria of either ‘a’ and ‘c’ or ‘b’
and ‘c’ as relevant:
a. A trading / service concern with total assets at cost excluding land and building
up to Rs50 million.
b. A manufacturing concern with total assets at cost excluding land and building
up to Rs100 million.
c. Any concern (trading, service or manufacturing) with net sales not exceeding Rs.
300 million as per latest financial statements.
Please refer to a checklist (Appendix X to Chapter 3.3) for clear distinction between
‘SME’ and ‘Corporate/Commercial’ (as these two FOTs are mixed-up mostly). The
said check list shall be tagged with all credit proposals being elevated for approval
from CBBG.
Section A of the checklist pertains to Trading & Service Concerns whereas Section
B of the checklist pertains to Manufacturing Concerns. Branches shall ensure that
checklist is properly and accurately filled and borrower that meets criteria of SME
should be reported (in CPs, AOFs and CRMIS reporting) as SME accordingly.
Furthermore if an individual meets the criteria mentioned in the checklist, he/ she
shall also be categorized as SME.
3- Corporate / Commercial:
Customer, other than the one defined under the SMEs, Consumer, Agriculture and
Micro Financing shall be categorized as Corporate / Commercial.
MCB’s Internal Definitions
While for the purposes of ascertaining the appropriate level of Credit Approval /
Review Authority and the relevant credit approval process / formats, borrowers of
the bank have internally been sub-divided into two categories viz. Corporate-Large
and Corporate-Commercial (for details refer Section 2.2.3 of Credit Handbook).
The Corporate-Large category includes entities with Annual Group Sales exceeding
PKR 3 Billion; while entities with Annual Group Sales of up to PKR 3 Billion are
categorized as Corporate-Commercial.
The above categorization into Corporate-Large or Corporate-Commercial is

different from FOT and should not be confused with the same.
Every Credit Proposal and Approval of Finance should explicitly state Financed
Organization Type (FOT) of the customer only as per the guidelines mentioned
above (terms like individual, sole proprietor, etc. should not be used as FOT in CPs,
AoFs and monthly reporting).
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3.4 Credit Pricing
3.4.1 Introduction
3.4.2 Responsibilities and Timelines
3.4.3 Deviations
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3.4.1 Introduction
The pricing of a credit transaction is dependent on a number of factors that

include, among others, cost of funds adjusted for liquidity and cash reserve
requirement, market rates offered by competitors, credit risk premium, etc.
Although various factors have been presented for pricing credit, the approved
Pricing Grids / Mark-up Circulars on this matter should be given priority. The
starting point of any pricing shall be Normal Markup rate (Timely Payment Markup
Rate) notified in terms of Mark-up Circulars / Pricing Grids and where there is a
justification / competitive consideration, the same may be negotiated subject to
approval by competent authority. In case of branded consumer products, the
pricing indicated in the product circular shall usually be adhered to, whereas
markup agreements in all cases are executed at Standard Markup Rate.
KIBOR Based Pricing
With effect from Feb. 2004, in terms of SBP circular it is mandatory for banks to
quote pricing on the basis of KIBOR, with spread and reset period specified for all
types of customers. Following are some requirements for KIBOR based financing
structure:
i. KIBOR shall be taken as KIBOR on the day of draw down and subsequently on
first working day of the relevant tenor (calendar month, quarter, half year, year
etc.). In other facilities (e.g. DF) where draw down is allowed in tranches or
enhancement is allowed by relevant CA/RA, the rate shall be applicable to the
tranche/enhancement amount and KIBOR shall be taken as KIBOR on the day
of draw down and subsequently as mentioned above.
ii. The frequency of re-pricing/ resetting has to match the KIBOR used as
benchmark.
iii. Spread over KIBOR shall not be changed during the tenor of the loan once
determined at the time of execution of finance/ loan documents.
iv. There shall be no clause in the loan documentation regarding change of spread
anytime during the tenor of the finance. All related documents shall clearly
indicate the spread over the benchmark (KIBOR or any other rate).
v. Finance agreement should not contain the clauses/stipulations to change the

rate unilaterally.
vi. All charges, other than mark-up, including fees/prepayment penalties etc. to
be recoverable, should be clearly disclosed and agreed with the customers at
the time of entering into finance/ loan agreement.
vii. A complete amortization schedule shall be provided to the customer along with
the facility offer letter showing the breakup of principal and mark up to be paid
by the customer over the life of the loan/finance or till the next re-pricing date.
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viii. A statement showing outstanding position of principal and markup should be

issued to the customers on half yearly basis as per format attached as
Appendix I to Chapter 3.4.
Approving /reviewing authority shall specify the minimum pricing in AoF, Business
Groups may agree and convey higher pricing to the customer at their own
discretion subject to obtaining approval from relevant approval authority only. This
shall be capped at respective business group heads. In exceptional cases keeping in
view the profitability and risk profile of the customer, relevant business Group
Head may allow lower than approved pricing subject to the condition that it should
not be lower than Pricing Grid. A copy of such approval for charging lower pricing
should be marked to relevant approval / review authority for information. Business
Group Heads shall also be authorized to allow change in approved base rate. The
effective date of new rate should be properly mentioned in all proposals, approval of
finance and facility acceptance letter. The rate should be changed/ charged after
obtaining acceptance from the customer on FAL/SA. This process will eventually be
replaced by a formal capital allocation process which will risk adjust returns. This
will be a part of the Basel II exercise.
3.4.2 Responsibilities and Timelines
Pricing is a Risk issue, only to the extent of highlighting return on Economic

Capital. Risk will highlight issues where we are not being compensated for the risk
being undertaken, and may seek review of pricing at the level of the President.
On a yearly basis (at least 30 days prior to the beginning of calendar year),
Business Groups (WBG, CBBG and Islamic Banking Group) shall submit their
respective pricing grids to ALCO for review. ALCO and/or Business Groups may
also review the pricing grids on need basis during the intervening period.
Following approval by ALCO, Business Groups shall forward their respective

pricing grids to CRMD at least 15 days prior to the beginning of each calendar year
on the recommended formats attached as Appendix II and III to Chapter 3.4
CRMD would review the proposed pricing grids and would elevate the same to MCC
for approval. Business groups shall be responsible for ensuring compliance with
the approved pricing grid.
This process of approval/ revision of pricing grid can be done at any time during
the year, as and when required by Business Group Heads.
3.4.3 Deviations
Exceptions (reductions) to pricing from the pricing grid as notified will require
approval as follows:
o President can approve requests for up to 25 basis points reduction
o Any further reduction would require MCC approval.
For WBG clients only, a below grid pricing request would require a proper
justification along with a detailed analysis as justification for the request.
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In this regard, the share of wallet analysis is required to be used to quantify MCB’s
return from the account as a justification for the recommendation for below grid
pricing. A suggested format for the analysis is attached as Appendix IV to Chapter
3.4.
MCB’s share in the total wallet (financial & bank charges paid by client) can be
captured from the annual reports of the client and the data available with the
business group. The total wallet would include revenue earned from the various
funded and un-funded facilities as well as other fee and commission based
services. Where data is not readily available, suitable assumptions (clearly stated)
should be incorporated in the analysis.
For each case, Share of Wallet (MCB revenue / Total wallet), Cross-Sell ratio (all
non-lending revenue / lending revenue) and Yield of the Account should be
computed. If so desired, the business group can include income from the specific
client earned by other group companies (Adamjee Insurance, MCB AMC, etc.) as
justification for the below grid pricing request.
The proposal for below grid pricing should be forwarded to sanctioning authority
along with the above mentioned analysis to justify the same.
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3.5 Credit Approval and

Facility Acceptance
Processes
3.5.1 Credit Approval Process-flow
3.5.2 Facility Acceptance Process
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3.5.1 Credit Approval Process-flow
The credit approval /review hierarchy has been elaborated in Chapter 3.1 of this
manual. All credit proposal initiated by the business groups shall invariably follow
the process-flows detailed in the attached appendices as follows:
o Appendix I to Chapter 3.5 – Credit Proposal process flow for all credit
proposals (where CRC support is available)
o Appendix II to Chapter 3.5 – Credit Proposal process flow for all credit
proposals (where CRC support is not available)
3.5.2 Facility Acceptance Process
All authorities signing on AOF shall ensure to mention their names, designation
and the date of signing must be clearly legible on the AOF. Where CRC is present,
all Facility Advising Letters / Sanction Advices shall be prepared by the CRC
personnel (Appendix III to Chapter 3.5 – Facility Advising Letter process flow). For
branches where CRC is not present, like all other CRC related tasks, FALs shall
also be prepared by the branches.
Wholesale Banking Group – Facility Acceptance Process
For the Wholesale Banking Group, excluding Investment Banking, the following
process-flow shall govern the facility acceptance process.
- CRCD shall prepare the draft of Facility Advising Letter (FAL) as per the
Approval of Finance and communicate the same to the Marketing Unit.
- If a modification is required, the Marketing Unit shall request CRCD for the
same. CRCD will, if agreed, incorporate modifications and send the revised
FAL to the Marketing Unit. In the event of a disagreement between CRCD
and the Marketing Unit, CRCD will elevate the matter to the relevant credit
sanctioning authority whose decision shall be final.
- CRCD and the Marketing Unit would jointly sign the final FAL.
- The Marketing Unit shall be responsible for communicating the FAL to the
customer and obtaining accepted copy of the same from the customer.
- The Marketing Unit shall retain a copy of customer’s accepted FAL and pass
on the original to CRCD.
Commercial Branch Banking Group – Facility Acceptance Process
For CBBG the following process-flow shall govern the facility acceptance process.
- CRCD shall prepare the draft of Facility Advising Letter (FAL) as per the
Approval of Finance and communicate the same to the branch.
- If a modification is required, the branch shall request CRCD for the same.
CRCD will, if agreed, incorporate modifications and send the revised FAL to
the branch. In the event of a disagreement between CRCD and the branch,
CRCD will elevate the matter to the relevant credit sanctioning authority
whose decision shall be final.
- CRCD and branch would jointly sign the final FAL.
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- The branch shall be responsible for communicating the FAL to the customer
and obtaining accepted copy of the same from the customer.
- The branch shall retain a copy of customer’s accepted FAL and pass on the
original to CRCD.
In case of temporary extensions, CRCD shall not perform the first step of seeking
the opinion on the draft to FAL for temporary extensions. It will prepare the FAL
and send it to Branch/ Relationship for onward communication to customer.
Detailed processes flows along with roles and responsibility are defined in the
Service Legal Agreements between Business Groups and CRCD.
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3.6 Product Program Manual

Framework
3.6.1 Definition
3.6.2 Contents
3.6.3 Approval Process
3.6.4 Annual Audit Requirement
3.6.5 Annual Reviews
3.6.6 Temporary Extension
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3.6.1 Definition
A Product Program is documentation of product or facility specific credit approval

requirements, risk parameters and related business strategies
3.6.2 Contents
All Product Program Manuals (PPMs) must discuss in detail the business strategy,
target market, major risks and mitigants thereto, risk acceptance criteria, rules for
approving credit, security perfection standards, caps proposed, process for
compliance and reporting standards, accounting procedures, and entries &
practices. Detailed format is enclosed as Appendix I to Chapter 3.6.
We have tried to cover the information requirement for a diverse portfolio of

products ranging from consumer banking to treasury to Islamic Banking as well as
conventional loan products. Business units would be required to select the
appropriate items that they consider material for their respective product
program(s). Appendix I to Chapter 3.6 provides guidelines for this process and
units may provide any other relevant information that can help in decision making.
3.6.3 Approval Process
Management Credit Committee (MCC) will be the approving authority for all new
lending product programs prior to the launch of the related products.
All Product Programs will require recommendation from respective Business Group
Head and Group Head Risk Management. The new product program will be
submitted to the MCC for approval only after signature/recommendation from all
the requisite Group Heads. This is to avoid circumstances where products are
launched before fulfilling the necessary approval requirements.
Different groups would be required to assess the risk involved in introduction of the
new product. A sign-off by any group would imply that they consider the risk
acceptable as far as the scope of their function is concerned. At a minimum, in
addition to the concerned Business Group Head and the Group Head Risk
Management (as mentioned earlier), the following groups would sign-off on all
PPMs:
• Compliance Department
• Legal Affair Division
• IT Department (where applicable)
• Operations Department
• Treasury (where applicable)
• Human Resources Division (where applicable)
Financial Control Group will approve accounting entries and reporting

requirements.
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For Treasury/ Capital Markets related products or products perceived to have a

high degree of market risk exposure, RMG would submit its recommendations to
ALCO for review and onward submission to MCC for approval
The recommending and approving authorities should ensure that the analyses
underlying the product program are representative of the conditions at the
proposed launch timelines i.e. the analyses and information are current. The
Business Group shall be responsible to ensure that the related product is launched
within proposed launch timelines. In case the product launch is to be postponed to
well beyond the initially proposed timeframe on account of any unavoidable
circumstances, fresh analyses should be done and represented in a revised PPM for
necessary approval by the above-mentioned authorities.
3.6.4 Annual Audit Requirement
Internal audit Group will be required to conduct audit/review of the product

program at least once a year.
3.6.5 Annual Reviews
Annual renewal for all Product Programs would be required from MCC. Annual
Renewal must reach RMG at least 30 days before the expiry of the product
program.
At a minimum, the annual review submission must include following:
Business Performance results
This section should provide a detailed analysis of business performance in

terms of:
• Revenue and profitability

• Portfolio quality and break-ups
• Non Performing Portfolio
• Variances from targets and analysis/ reasons thereto
• Comparison on how similar products of other banks have performed in the
period
Any changes in target market, credit quality, market conditions, business

environment, risk acceptance criteria etc.
Future Business Plan and Targets
Copy of audit report with comments from business unit. It must be ensured that
internal audit is conducted before annual review.
Any other relevant information that can help in decision making
If there is a material change in the product program and / or material amendments

are required to be incorporated in the same, sign off from the relevant Group(s)
would be required, as deemed appropriate.
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3.6.6 Temporary Extension
Extensions in the expiry date of an existing product program in force can be

obtained by elevating the request for the same along with valid reasons. The first
such extension can be obtained by relevant Business Group Head who is
authorized to approve a maximum extension of 90 days. Any further extensions
would require the President’s approval based on Group Head RMG
recommendations. Approval from other original signatories to the original product
program is not required for PPM extension.
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Credit Handbook
Section 3
Appendices
109
Date of Compilation Branch Name Code

Investigator Mr. Grade Emp. No.
CREDIT WORHTINESS REPORT PROFORMA
a) Name of Customer
b) Group
c) Registered Address
Phone No. Fax No.

d) Business Address
Phone No. Fax No.
Business Venue
a) Ownerships / Rented
b) Leased / Un-leased
c) Area / maintenance
a) Nature of Business item

b) Date of Establishment c) Registration No. & date
d) National Tax Number & Tax paid last Year
e) Import Registration No. f) Export Registration No.
Constitution of the Firm
Name and Share of the Proprietor / Partners / Directors (Main Sponsor First)
Name Father’s / Husband’s Name N.I.C. No. % Share
Brief History / Antecedents of the Proprietor / Partners / Director
Details of their Allied Concerns
a) Details of Business Assets and figure of Latest Audited Balance Sheet with date (where applicable)
b) Number of employees
Date of Compilation Branch Name Code

Investigator Grade Emp.
110
Mr. No.
Financial Stake of the client in business
a) Market Reputation
& Source of the
same
Investigation from
at least two
suppliers must be
mandatory
x) Financial Stability
Business potential of the concern Last Year Sales
Association
a) Name x) Membership No.
1.
2.
Name of their previous / other Bankers
Report of their previous / other Bankers
Nature of Default, if any other Bank Financial Institutions
Business Performance (Current Year)

a) Turnover Dr. Rs. (M) Turnover Cr. Rs. (M)
b) Avg. Balance Dr. / Cr. Rs.
c) Present Balance Rs. (M)
d) Other Deposits Rs. (M)
Details of Account
a) A/C No. b) Type of A/C c) Date of A/C Opened
Person Contacted
a) Name b) Designation
Any other Information
( SIGNATURE ) ( COUNTER SIGNATURE )

( NAME OF THE PREPARER ( NAME OF THE COUNTER
WITH DESIGNATION ) SIGNATORY WITH DESIGNATION )
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EXPLANATORY NOTES / GUIDE LINES FOR COMPILATION OF CREDIT
WORTHINESS REPORT
Credit Report plays a vital role in assessing the credit worthiness of the Customer.
A high degree of care and attention should be paid to the credit investigation and
compilation of such reports. Credit report should be comprehensive as to give clear
picture of the important aspects like net worth of the party, their general
reputation, experience, position of borrowings and stuck-up loans and operating
performance. It is the function of credit investigator to search out and obtain
complete reliable information and to undertake the painstaking investigation of
affairs of the applicant through banking, trade and competitive sources.
While undertaking a credit investigation, numbers of sources of information are

employed while the following are most important:
1. The applicant himself from whom information is obtained during the interview
which is outlined in the report.
2. Financial statements (Profit and Loss Statements and Balance Sheet).
3. The Bank’s own record.
4. Credit Information Bureau reports of State Bank of Pakistan.
5. Other Banks with whom the applicant maintains account.
6. Market report including from those who sell the raw materials to the applicant
or to those to whom finished goods are sold.
7. A visit to the plant and office of the applicant.
If the subject of the bank investigation is an individual the following questions

should be asked where applicable.
⇒ How old is the individual?
⇒ With what Company or Enterprise is he connected?
⇒ What is his present position?
⇒ How long has he been employed in his present position or engaged in
professional work?
⇒ What is his annual Salary or Income?
⇒ Does he own his own home?
⇒ What was his previous connection or business?
⇒ What is the condition of his health?
⇒ Is he prompt in meeting his obligation?
Credit Investigator will report the results and findings in orderly sequence under
the following headings (Specimen is enclosed as Annexure – 6.3).
1. a) Name of the Customer

Name of the customer for which credit report is compiled. This must be
reported as it appears in the account opening form.
b) Group
Mention name of the business group to which the customer belongs if
applicable.
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c) Registered Address, Phone No. and Fax No.
Mention registered address if the borrower is a business concern and
registered company. Also mention Phone number(s) and Fax number(s).
d) Business Address
Mention business address if the borrower is a business concern. In case of
Individual mention usual Residential Address. Also in both cases, mention
Phone Number(s) and Fax No(s).
2. Business Venue
a) Ownerships / Rented
Mention one of them. If the business premises are rented, mention amount
of rent per month.
b) Leased / Un-leased
Mention one of them. Either it will be leased or un-leased.
c) Area / Maintenance
Mention the area of the office and also its maintenance, whether the office
is well maintained or not.
3. a) Nature of Business
Their line of business whether the company operates as manufacturers,
retailer, importer or whole seller and items dealt in.
b) Date of Establishment
i) In case of Proprietorship concern, please report date of establishment
as declared by Proprietor or date on which license was obtained from
any Government Body.
ii) In case of Partnership please mention date on which Partnership Deed
was executed.
iii) In case of Limited Company please mention the date of Certificate of
Commencement of business as issued by the Registrar Joint Stock
Companies.
Dates of consolidation of mergers, if any should also be mentioned.
c) Registration No. & Date

Mention Registration number of certificate of incorporation and date in
case of Registered Company or Partnership Registration No. and Date of
Registration.
d) National Tax No. & Tax Paid Last Year

Mention National Tax number allotted to the company in case of business
concerned and also mention the amount of Tax paid last year.
e) Import Registration No.

Mention the Import Registration number on the space provided.
f) Export Registration No.

Mention the Export Registration number on the space provided.
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4. Constitution of the Firm
Legal status of the company, write whether the customer is a Proprietorship,
Partnership, Private limited company, Public limited company in the Public
sector, Govt. Department, Autonomous body, Trust, Co-operative Society etc.,
as the case may be.
5. Name and Father’s / Husband’s Name, CNIC No. and Share of the
Proprietor / Partner / Director (Main Sponsor first)
Strike off Proprietor / Partner / Director, whichever is not applicable.
Thereafter, report name of the Proprietor or, in order of importance, name of
the partners of the firm or Directors of the company with father’s / husband’s
name and NIC number, obtain copy of CNIC for record. Also, mention
respective percentage of shareholding.
6. Brief History / Antecedents of the Proprietor / Partners / Directors

Please mention brief history of the clients i.e. origin of the owner Proprietor /
Directors and to which business community they belong / general background
/ experience. Qualification of directors may also be obtained, where possible. If
they hold life insurance policies details of the policies amounts insured and
name of the Insurance Company may be stated.
7. Details of their Allied Concerns

Please mention clearly, the names, addresses and composition of their allied
companies.
8. a) Details of Business Assets and figure of latest Balance sheet (where

applicable)
In case of Proprietorship and Partnership, mention the amount of Capital
which is invested in the business by his / their own resources. Details of
assets such as stock in hand, landed properties of the Company /
Proprietor / Partners and their family members along with municipal
survey number and address.
In case of manufacturing unit, mention annual production capacity and list
the details of machinery. Please also mention whether the factory building
/ machineries are rented or are owned properties. Photo copy of property
documents and electricity bills may be helpful. If the factories, shops or
godowns are insured, state the name of insurance company and amount
for which insured.
In case of limited company, please mention the latest figures of their assets
and liabilities as per their audited Balance Sheet and obtain a copy of
Audited Balance Sheet, Form 29 and Form ‘A’.
b) Number of Employees
Number of persons employed in the business is to be mentioned.
9. Financial Stake of the clients

You have to judge the customer’s means. For this, we have categorized the
means on page 5 of 5 of this. As such the amount assessed will fall in any of
the category of means.
10. a) Market Reputation

Mention Market Reputation (to be collected) through independent enquiries.
Market Reputation & Source of the same investigation from at least two
114
suppliers must be mandatory. Market reputation will fall in three categories
(a) Good (b) Fair (c) Bad.
b) Financial Stability
State whether the company is financially sound / appears good or not.
11. Business Potential of the Concern and Last Year Sales

State whether the company is progressive or under recession. Also mention last
year sales amount in million.
12. Association
Mention name and membership number of associations.
13. Source of Market Report

At least two respectable and reliable firms / customers should be consulted,
preferably our customers and their names should be incorporated along with
address and telephone numbers.
14. Name of their Previous / Other Bankers

Please mention the names of their previous bankers along with the name of
their branches. Also mention the date account was opened and range of
balance maintained.
15. Report of Previous / Other Bankers

Mention what they have reported on them.
16. Nature of default if any with Other Banks / Financial Institutions

Please mention whether they are defaulter of any Bank or not. Figures may be
obtained from State Bank of Pakistan’s eCIB Report.
17. Business Performance (Current Year)

Mention current year figures of turnover debits credit and average balance
maintained in debit or credit with amount. Also, mention present balance and
figures of other deposits. Figures shall be reported in millions of rupees.
18. Details of Account

Mention account number and type of account such as current, savings, etc.
Also mention date account opened.
19. Person Contacted

Mention name of the person or partner or director of the company with
designation contacted.
20. Any other Information

Any other information of the Customers if not covered above.
It must be noted that these reports are meant for our internal use only. These
are not to be forwarded to their clients and to outside Agencies, DFIs, Banks.
When any request letter for credit worthiness report is received from any Local
/ Foreign Banks / DFIs, Embassies and Government Agencies etc., it may be
supplied by branch in the form of the usual short Bank report (Circular No
PO/CMD/PI/875 dated September 7, 2001).
115
The following format may be used for the call reports.
CALL REPORT
Name of Calling Company with Address:
Calling Officer (s) Calling Upon

(Name (s) & Designation) (Name(s) & Designation)
Date:
Purpose of the call: (One or two lines only)
Details
(Details incorporating issues mentioned on the previous page.
Conclusion / Evaluation
Action Plan / Follow-up / Target Dates
Signature Name and Designation of person writing the call report.
Supervisor Name and Signature
Copies to: Branch Manager

Regional Manager
General Manager
Area Corporate Office
116
Appendix III to Chapter 3.2
MCB Bank Ltd.
Name of Branch
Postal Address
Private & Confidential
CREDIT ENQUIRY
To,
Dear Sir,
Kindly provide your opinion in confidence as to the means, standing and

credit history of:
Any information that you may give will be treated in strict confidence.
Yours faithfully,
Manager
Phone #: Fax #:
117
Appendix IV to Chapter 3.2
Date:
Applicant’s Name and Address:
CONFIDENTIAL
Dear Sir,
CONFIDENTIAL CREDIT REPORT ON [Name of Client]
This refers to your [Reference number of applicant’s request letter] on the subject. We are
enclosing herewith our credit opinion of the above-mentioned client.
This opinion is being provided to you under practices and usage customary among bankers, at
your request in strict confidence for your use only and should not be passed on to any third
party. This opinion has been furnished to the best of our knowledge, in good faith and
without prejudice; and it does not in any way constitute any warranty or financial undertaking
and is being given to you without any risk and responsibility on the part of MCB Bank
Limited or any of its subsidiaries or affiliates or employees.
Regards,
Authorized Signatory
118
CREDIT REPORT OF [Name of Client]
CONSTITUTION OF THE COMPANY
NATURE OF BUSINESS
NAME OF DIRECTORS
PAID UP CAPITAL
DATE OF INCORPORATION/REG
NATURE OF FACILITIES
FUNDED AS WELL AS NON-FUNDED (whatsoever applicable)
RESUME OF CREDIT EXPERIENCE
The Subject Company has been availing funded as well as non-funded credit facilities from
our bank. Their dealings with us are [conduct of the account as to good, satisfactory, average
etc.].
119
Name of Customer:
A- Routing Sheet
Customer Group *GECP Approval Proposed Expiry of Region / Branch Last Approval Date
Level WC Facilities** (Code) No. and Date
* Specify the GECP viz. WBG / IBG / CBBG

** Indicate next review date for term exposure i.e. where only the term finance has been extended.
CP date should be within 6-months of financial year end. For Group Accounts, proposal should have the same expiry
and ideally be elevated in one lot to the credit approval / review authority. Further, group name must be same for all
accounts belonging to a single group.
PKR in Million
Business Group Funded Non Funded Aggregate Funded Non Funded Aggregate
Limit Existing Existing Proposed Proposed Proposed
Existing
Corporate
Commercial
Islamic Banking
Treasury*
Investment Banking**
FI
Capital Markets
Aggregate Facilities
(Bank-wide)
*Forward and Spot cover. ** Underwriting commitment (off balance sheet financing)
Recommendation Chain Date Name/ Signature Comments
Relationship Manager
Unit Head
Regional Manager
Business Head Portfolio Management
Group Head WBG
Credit Proposal Checklist

Serial Documentation included in Attached Rationale for not furnishing the document(s)
# Credit Package Yes No
1 Credit Proposal
2 Credit Comments / Memorandum
3 Basic Information Record
4 PR Checklist
5 eCIB Report (not more than 1 month
old)
6 Application of Finance
7 BBFS
8 Yield Statement
9 Call Report (not more than 1 month
old)
10 CRR
11 Spreads
12 Audited Accounts Confirmation also required that Auditor has signed off
13 Quarterly Accounts If proposal is elevated after 4-months from FY end
14 Stock Report Only confirmation required that it is held
15 Stock Inspection Report Only confirmation required that it is held as per
Handbook
16 Search Report
120
17 Valuation Report Only summary page needs to be attached
18 Bank Checking Only confirmation required that these are held
19 Watch-List report (if applicable)
20 CRCD Remarks/ UER Exceptions Must be provided with all CPs
21 Detail of Deposit Account of Customer
22 Brief Customer Report (generated
through CRMIS)
121
Name of Customer:
B- SF-86 / Credit Proposal
eCIB CRR & CRR & Yield Yield Classificati Internal / Covenant PR Credit
Weighted Weighted (previous) (current on / Watch- External Compliance Compliance Handbook
Average Average ) List Status Audit Compliance
CRR CRR Compliance
(previous) (current)
• For items tabulated above provide the status as (i) For eCIB as ‘Clean’ or ‘Qualified’ (ii) Mention ‘CRR’ , weighted
average CRR and ‘Yield’ (iii) For other fields mention compliance status as ‘Yes’ or ‘No’. Any adverse remark to
any of these items needs to be explained in detail in later sections of CP and/or Credit Comments.
• eCIB to be obtained for the group, name of bank to be mentioned if report is not clean.
PKR in Million
1. Facilities
*Facility Limit Outstanding IDA Terms and Conditions
Existing: Current (as Status: Fresh / Renewal / Enhancement / Reduction etc.
of):
Purpose: General statement (for instance WC requirement)
should be avoided. Purpose should be structured / stated to
Proposed Maximum:
cover specific funding requirement of the client
Average: Existing Pricing Proposed Pricing
In case relationship proposes change in base rate / spread, then

effective date of change must be clearly mentioned.
Margin: Specify the margin
Security: Specify if proposed security is different from existing

arrangement.
Stocks: mention items, margins, valuation date, and location.

Deposit Receipt / Certificates: Face value, market value, status
of lien
Property / Fixed Assets: owner’s name (self-occupied /rented),
Property Number, Area Details, Nature of charge (Regd. /
Equitable), other encumbrances, legal clearance, noting of lien
in land revenue / authority record.
Charge Registration: Date of charge registration, Asset, Amount
of Charge, Ranking, NOC from senior charge holders, other
charge holders name and amount.
For charge on fixed assets, RM should separately highlight FSV

of land, building, plant & machinery. Value and date of
valuation, valuator’s name to be mentioned. Business Group is
required to confirm that (a) valuator is on approved panel of
MCB and PBA, (b) valuation was conducted within the last
three years, and (c) scope was within the limits granted by MCB
/ PBA to the valuator.
122
Details of securities held for the existing facilities and those which will be held for the proposed
facilities (existing / fresh / enhancement) are to be mentioned against each facility. Security covering
Collateral
more than one facility to be mentioned only once stating the facilities that it covers, so that value is not
double counted.
Repayment Criteria for determining when the facility should be repaid. For term facility please specify (a) date of
Arrangement final recovery of principal (b) frequency of recovery of installments, For BGs incorporate date of expiry.
* Separate box for each facility (fund or non-fund) to be inserted.
2. Total Facilities PKR in Millions

Type of Facility Present Limit Proposed Limits Current Outstanding as of
Total Fund Based

Total Non-Fund Based
Aggregate Facilities (FB +NFB)
3. Comments by SBP/ Internal / External Auditors

S. No. Comments by SBP / Internal or Commitment by Business Group Progress to Date
External Auditor
Brief description, specify date of
Incorporate date of commitment
observation also.
Incorporate provisioning for accounts classified by SBP and state progress made since classification and future
strategy.
4. Remarks by Credit Risk Control Division (CRCD)

Commitment by Business Group
S. No. Remarks by CRCD/ UER Exceptions
with timelines
Briefly mention comments by CRCD regarding security / documentation shortfall or any other aspect, along with
necessary action to be taken there against.
5. Waivers/ Deviations
S. No. Waivers and/or Deviation from Credit Handbook / Circulars / Justification Status
Previous Approval (Existing / Fresh )
Mention any post facto approval, waiver and/or deviation obtained over the last 12 months. Relaxation obtained
from SBP, if any, should be mentioned separately. Mention status of deviations / waivers as either existing or fresh.
For waivers / deviations already approved, mention if they are continuing or not.
6. Customer Business Performance

Customer Business Performance(last three calendar years)
Product 2008 2009 Last Commitment (2010) Actual (2010) Future Commitment (2011)
Import
Export
Guarantee
Total
Deposits
Earnings
Mention detail of business routed through MCB by the customer along with commitments for the next 12 months.
123
Name of Customer:
7. Business Potential
Business Potential Revenue
Product Total MCB’s Share MCB’s Share (%) Product Current Projected
Business (%) Current Proposed
Lending - WC Lending
Lending – Long Term Trade / Guarantee
Import Treasury
Export Investment Banking
Guarantee Cash Management
Deposits Deposits
Total
8. Group Summary
GROUP UNIT’S Limit Amount Variation O/S as on Overdue for Payment Due since
NAME Existing Proposed ( +, - ) Principal Mark-up (Oldest date)
Client Name / Business Group : d )
CRR : F.B.
N.F.B.
Client Name / Business Group :
CRR : F.B.
N.F.B.
CRR : F.B.
N.F.B.
CRR : F.B.
N.F.B.
CRR : F.B.
N.F.B.
TOTAL
9. Adverse Remarks on Group Companies

Any adverse remarks on group companies (eCIB, pending markup / Group concerns not availing
installment, etc.) credit facilities from MCB
Mention names of business units
Mention adverse remarks / details of qualified eCIB report here (if any).
(whether maintaining non-
eCIB Report dated: FB NFB Total Overdue Default borrowing account with MCB or
Client not) that form part of the Group
Group Total (including above) but are not availing any credit
Name of Bank / FI (if default) facility from MCB.
10. Group Business Performance
Group Business Performance(last three calendar years)
Import
Export
Guarantee
Total
Deposits
Earnings
Name & Signature of Relationship Manager Name & Signature of Unit Head
124
Name of Customer:
C- Credit Comments / Memorandum

1. Purpose
The purpose should be specified for the request / credit package.
2. Facility Rationale / Justification (Facility Wise)

Requests for enhancements, fresh facilities and one-off transactions should be supported by due justification /
rationale there against. This section of the proposal should capture purpose of proposed facility, evaluation of
requested amount with respect to production capacity and funding requirement of the client, pricing (list spread from
competing banks), value addition through the proposed arrangement, etc.
Synopsis of last 12 months, containing brief description of changes in credit facilities i.e. enhancements, one-offs,
reductions, any other financial accommodation, should be provided.
For BMR/Capex/ Project Financing, discuss viability of the investment.
Discussion should also include rationale for facility restructuring or reduction in existing limits, if applicable.
3. Financial Summary
Financial analysis – The aim of the financial analysis should be to provide qualitative/quantitative information which
is not available from the spreads. Discussion should evolve around account heads reflecting material movements
between the two audited accounts. Stating increase/decrease in amount/percentage should be avoided; the emphasis
should be to uncover the underlying reason(s) which led to the change.
Business Unit is required to confirm that director loan (if any) is subordinated with MCB, and should also briefly
discuss any intercompany borrowing. Unit should try to extract ageing of receivables, evaluate marketability of stocks
in consultation with the client, and highlight any balance sheet mismatch. If material, Off-balance sheet financing /
Contingencies/ Commitments to be briefly discussed.
Variance analysis – Emphasis needs to be on explaining underlying reason for the variance (projected numbers vs.
audited numbers)
Projections – It should include projections up to one year for Working Capital Lines and till final adjustment in case of
Term Facilities. Sensitivity analysis is required for term exposures. Covenants should be listed and reason for any
breach should be explained including future course of action to strengthen MCB’s position.
Quarterly accounts - Latest set of quarterly accounts to be attached with the credit package (if Credit Proposal is
elevated after 4 months from financial year end), and only significant observations need to be pointed out. Write-
up/analysis is not required for quarterly accounts.
CRR - Brief account of key reasons for improvement / deterioration in CRR should be provided.
Balance Sheet and Income Statement: Mention status i.e. Audited/ Unaudited /Certified by Chartered Accountants
but not audited
Balance Sheet 2007 2008 2009 Variance (2009 vs. 2008) Reason for Change
(last three years)
Stocks
Receivables
Current Assets
Net Fixed Assets
Other Long Term Assets
Total Assets
Creditors
125
Short Term Borrowing
Current Maturity of Long Term Debt
Current Liabilities
Long Term Debt
Directors’ Loan
Total LTL
Revaluation Reserves
Capital
Other Reserves + Retained Earnings
Equity
Equity+ Liabilities
Income Statement 2008 2009 2010 Variance Reason for Change

(last three years) (2009 vs. 2010)
Sales
Gross Profit
Other Income
EBIT
Interest
PAT
Financial Indicator 2008 2009 2010 Variance Reason for Change

(Ratios) (2009 vs. 2010)
(last three years)
Gross Margin
Net Margin
Interest Cover
DSCR
Current Ratio
Stock Days
Debtor Days
Creditor Days
Total Lib/Equity
Linkage Ratio
Cash Cycle
NOCG – Int. - Tax
Off-BS Financing
Formulas of the above Financial Indicators / Ratios are given in ‘General Guidelines’ attached herewith.
Cash Flows - The emphasis should be more on projected cash flow than historical figures. Analysis should cover
adequacy of operating cash flows to meet funding requirement as well as repayment capacity of external financing
sources and sustainability of cash flows.
4. Industry outlook / Peer analysis

Industry analysis should reflect the current macro environment and expected developments over the medium term,
change in government regulation and its impact on the sector. Peer analysis should include comparative analysis with
three similar companies operating on similar scale and in same line of business. Peer analysis would not be required
in cases where comparable firms are not operating. Please state recent trends in raw material and finished good prices.
Financial Indicator Client Company A Company B Company C

Prod. Capacity
Capacity Utilization
Sales
Gross Profit
126
Interest
Net Profit
Current Assets
Total Assets
Equity
Gross Profit Margin
Net Profit Margin
Interest Cover
Debt Service Coverage Ratio
Current Ratio
Stock Days
Debtor Days
Creditor Days
Total Lib/E
(STB+LTB)/E
Cash Cycle
Net Op. CF
5. Facilities from Other Banks/ FIs
Bank-wise facilities
Bank Facility Limit O/S Type of charge Amount of Ranking of charge Margin
charge
Total Total Total

Separate tables are required for current and fixed assets. If MCB holds a Parri Passu charge, please do not incorporate
ranking charges. If MCB holds a ranking charge then a separate table would be required which should reflect details
of facilities availed by the client against ranking charges.
Categorically indicate if MCB’s security is inferior to any other bank.
6. Security Analysis
Relationship manager should comment on quality of receivables (ageing) and stocks (saleable value). For financing
against fixed assets, please comment on potential recovery if assets are to be sold under distressed condition.
7. Repayment Behavior
Delay in Recovery of Markup / Installment (last four quarters)
Q1 Q2 Q3 Q4
Incorporate number of days by which markup / installment was delayed
8. Risks & Mitigants

Risk Impact on Repayment Ability Mitigants
Financial Risk
Business Risk
Any other Risk
Industry and company specific risks and mitigants to be addressed.
9. Account Strategy
This should be a comprehensive section and should contain relationship strategy based on upcoming opportunities
(state expected time to materialize), any early warning signals, pricing, Capex/BMR, utilization levels, change in
yield, comment if trade business is lower than initially agreed, etc.
127
Identification of banks handling major part of client’s Cash Management and Investment Banking needs. RM should
try to extract Consumer Banking requirements of Directors / Executives of the company, once obtained same should
be forwarded to Consumer Banking Group.
Division / Group Comments* Possibility** Target Date

(High / Med / Low)
Cash Management
Investment Banking
Consumer Banking
* Categorically state if a new opportunity is identified.
** Probability of capturing the identified opportunity.
Account strategy should end with clear concluding remarks and recommendations (enhance / hold/ reduce / exit)
with regard to request made in credit proposal.
Enhance / Hold / Reduce / Exit
128
Name of Customer:
D- Basic Information Record
Company Information
Company Background Legal status (i.e. ownership type), date of establishment, brief company history,
industry and line of business
Plant location and Mention complete address where production facility / factory / mill / trading office
Business Address / head office of the customer are located.
Financed Organization Specify FOT of the customer as per CRMD Circulars issued from time to time.
Type (FOT)
Production Base Installed capacity and utilization (current and last year). Indicate if there are multiple
plants / sites. Historical trend of capacity enhancements.
Product Mix Breakup of sales by line of business segregated into local sales / exports
Suppliers List of suppliers; share of each of the top 5 suppliers in the overall procurement of the
client. Credit/purchase terms.
Buyers List of buyers, share of each of the top 5 buyers in the overall sales. Credit sales terms.
Strengths Compared to competing firms
Weaknesses Please propose strategy to overcome any limitation
Stock Market Data If listed on stock exchange, please provide market capitalization, PE ratio, dividend
yield. Compare the numbers with the ones falling on the last CP date
Share Holding Pattern

Directors/Partners /Proprietor Percentage Share Shareholders Percentage Share
Aggregate shareholding of
Directors
Total Total
Mention any material change in shareholding since last year
Company Management
Directors Briefly comment on reputation, capability and vision
Senior / Executive Management Briefly comment on education, experience and ability to execute business
and financial strategies
Access to Management Mention the name and designation of contact individuals and contact
details.
Succession Planning Comments on succession.
Mention any change in Directorship / Senior Management since last year.
______________________________________________________________________________
129
General Guidelines
1. Relationship manager’s initial required on all pages
2. Proposed font and size – Garamond 10
3. Ideally, credit comments section should not be more than 4 pages
Formulas of Financial Indicators / Ratios:

To be calculated from the figures of Balance Sheet / Income Statement.
i) Gross Profit Margin %

Gross Profit
Sales ± 100
Revenue
ii) Net Profit Margin %
Net Profit After Tax
± 100
Sales Revenue
iii) Interest Coverage Ratio
Divide Profit before interest and taxes by "Financial Charges".
Profit Before Interest & Tax
Financial Charges
iv) Current Ratio

This ratio is determined by dividing Total Current Assets by Total Current Liabilities. It is an indicator
of liquidity position of a business concern i.e. its capability of meeting its obligations expected to be
due in the next accounting period through its current assets.
Total Current Assets
Current Ratio =
Total Current Liabilities
v) Linkage Ratio (between Bank Borrowing & Equity)

This provides linkage between total exposure (fund based and/or non-fund based) availed by the
borrower from financial institutions and borrower’s equity as disclosed in its financial statements.
This ratio should be complied with SBP PR No. R-5 for Corporate / Commercial Banking.
Total Exposure availed from Financial Institutions (fund based and/or non-fund based)
Total Equity of the borrower(as disclosed in financial statements)
vi) Cash Cycle

This gives us the number of days required from purchase of Raw Materials / Stocks to realization of
sales revenue. This is calculated by using following formula:
Average _
(Average Inventory Average Payables) N
Receivables
ª ± 360 ±
(Cost of Goods Sales Purchases or
12
sold COGS)
______________________________________________________________________________
130
Note:
a. N = Number of months for which income statement relates.
b. Average Inventory / Receivable = Opening plus closing balance divided by two.
c. Cost of Goods Sold = Sales Revenue Less Gross Profit
vii) Stock Days

A ratio measuring how long on average it takes a company to convert its stocks into revenue.
Stocks
± 360
Cost of Goods Sold
viii) Debtor days

A ratio used to work out how many days on average it takes a company to get paid for what it
sells.
Trade Debtors
± 360
Sales
ix) Creditor Days
A ratio measuring how long on average it takes a company to pay its creditors.
Trade Creditors
± 360
Purchases
x) Debt Service Coverage Ratio (DSCR)

This is an important ratio used in determining the customer’s ability to honour its commitments
relating to repayment of long-term debt.
This is calculated by adding (i) Profit After Tax (ii) Depreciation & Non-Cash Expenses and (iii)
Financial Charges together and then dividing the aggregate by sum of (a) Financial Charges plus
(b) instalments of Long-Term Debt (including lease) due in the same year.
xi) Net Operating Cash Generated (excluding Interest & Tax)

This financial indicator provides the cushion available in cash flows of the company.
‘Net operating cash generated – Interest – Tax’
xii) Off-Balance Sheet Financing

A type of company financing that does not appear as a liability on the company's balance sheet.
A company may engage in off-balance-sheet financing if it wishes to keep its debt-equity ratio
low and thereby appear as if it is carrying little debt. This, in turn, makes the company look
more creditworthy than it would otherwise. A common form of off-balance-sheet financing is
an operating lease, in which a company rents, rather than buys, a capital asset. In an operating
lease, the company must record only the rental payments, and not the whole cost of the asset.
While off-balance-sheet financing is permissible, it can become unsustainable and can hide a
company's true financial state.
______________________________________________________________________________
131
A- Routing Sheet
Customer Group *GECP Approval Proposed Expiry Circle/ Region / Last Approval Date & Ref
Level of WC Facilities** Branch (Code) No. and Date No. of CP
* Specify the GECP viz. WBG / IBG / CBBG

** Indicate next review date for term exposure i.e. where only the term finance has been extended.
CP date should be within 6-months of financial year end. For Group Accounts, proposal should have the same
expiry and ideally be elevated in one lot to the credit approval / review authority. Further, group name must be
same for all accounts belonging to a single group.
PKR in Million
Business Group Funded Limit Non Funded Aggregate Funded Limit Non Funded Aggregate
Existing Limit Existing Proposed Limit Proposed
Existing Proposed
Corporate
Commercial
Islamic Banking
Treasury*
Exposure at any other
group
Aggregate Facilities
(Bank-wide)
*Forward and Spot cover. ** Underwriting commitment (off balance sheet financing)
Approval Chain Date Name/ Signature Comments

Branch Credit Manager
Branch Manager
Regional Manager
General Manager
Business Head
Credit Head
Group Head
Credit Proposal Checklist

Serial Documentation included in Attached Rationale for not furnishing the document(s)
# Credit Package Yes No
1 SF-86 / Credit Proposal
2 Credit Comments / Memorandum
3 Basic Information Record
4 PR Checklist
5 eCIB Report (not more than 1 month old)
6 Application of Finance
7 BBFS
8 Yield Statement
9 Call Report (not more than 1 month old)
10 CRR and & Weighted Average CRR
11 Audited Accounts Where applicable. Confirmation also required
that Auditor has signed off
12 Quarterly Accounts Where applicable. If proposal is elevated after
4-months from FY end
13 Stock Report Where applicable. Only confirmation required
that it is held
14 Stock Inspection Report Only confirmation required that stock
inspections have been conducted as per
Handbook requirements.
15 Search Report In case of a limited company
________________________________________________________________________
132
16 Valuation Report
17 Bankers report Only confirmation required that satisfactory
report have obtained and are held on record.
18 Watch-List report Where applicable
19 CRCD Remarks/ UER Exceptions Must be provided with all CPs
20 Detail of Deposit Account of Customer
21 Brief Customer Report (generated
through CRMIS)
22 Legal Opinion Where applicable.
________________________________________________________________________
133
Name of Customer:
B- Credit Proposal
eCIB CRR & Weighted Average CRR CRR & Weighted Average CRR Classification / PR Credit
(previous) (current) Watch-List Compliance Handbook
Status (if any) Compliance
• For items tabulated above provide the status as (i) For eCIB as ‘Clean’ or ‘Qualified’ (ii) Mention ‘CRR’, and
weighted average CRR iii) For other fields mention compliance status as ‘Yes’ or ‘No’. Any adverse remark
to any of these items needs to be explained in detail in later sections of CP and/or Credit Comments.
• eCIB to be obtained, name of bank to be mentioned if report is not clean.
1- FACILITIES: (Amount in Million)

Proposed
Existing O/S Initial Proposed
Fund Based Facilities: Status** M-up/ Tenor
Limit As on Date Limit Margin* Expiry
Com.
a.
b.
c.
d.
e.
f.
g.
h.
Total Fund Based
Facilities
Proposed
Non Fund Based Existing O/S Initial Proposed
Status*** M-up/ Tenor
Facilities: Limit As on Date Limit Margin** Expiry
Com*
i.
j.
k.
l.
m.
n.
o.
Facilities
Total Fund & N.Fund
Based Facilities
* Mup/ com: In case any change in base rate/ spread in proposed, effective date of change must be specifically mentioned.
**Margin: Specify the margin
***Status: Fresh / Renewal / Enhancement / Reduction etc.
Security: Please mention here facility wise security against each facility. Furthermore specify if proposed security is
different from existing arrangement. Following information shall be disclosed.
Stocks: mention items, margins, valuation date, and location.

Deposit Receipt / Certificates: Face value, Encashment value, status of lien
Property / Fixed Assets: , Nature of charge (Regd. / Equitable), other encumbrances, Property Number, Area Details,
owner’s name (self-occupied /rented), legal clearance, noting of lien in land revenue / authority record, value of
property (MV and FSV), date of valuation, valuator’s name.
Charge Registration: Date of charge registration, Asset, Amount of Charge, Ranking, NOC from senior charge holders,
other charge holders name and amount.
________________________________________________________________________
134
Borrowing from other Banks

2-MCB Exposure on this Group
(Limit)
Proposed Limit Present Limit Name of Bank WC LT
Customer Name Overdue
F.B. N.F.B. F.B. N.F.B.
TOTAL TOTAL
3. Comments by SBP/ Internal / External Auditors

S. Comments by SBP / Internal Commitment by Business Group Progress to
No. or External Auditor Date
Brief description, specify date of
Incorporate date of commitment
observation also.
Incorporate provisioning for accounts classified by SBP and state progress made since classification and future
strategy.
4. Remarks by Credit Risk Control Division (CRCD)

S. Commitment by Business Group
Remarks by CRCD/ UER Exceptions
No. with timelines
Briefly mention comments by CRCD regarding security / documentation shortfall or any other aspect, along
with necessary action to be taken there against.
5. Waivers/ Deviations
S. No. Waivers and/or Deviation from Credit Handbook / Circulars / Justification Status
Previous Approval (Existing / Fresh )
Mention any post facto approval, waiver and/or deviation obtained over the last 12 months. Relaxation obtained
from SBP, if any, should be mentioned separately. Mention status of deviations / waivers as either existing or
fresh. For waivers / deviations already approved, mention if they are continuing or not.
6. Customer Business Performance
Customer Business Performance(last three calendar years)
Import
Export
Guarantee
Total
Deposits
Earnings
Mention detail of business routed through MCB by the customer along with commitments for the next 12
months.
________________________________________________________________________
135
7. Group Business Performance (only for group accounts)

Group Business Performance(last three calendar years)
Import
Export
Guarantee
Total
Deposits
Earnings
Name & Signature of Credit Manager Name & Signature of Branch Manager
________________________________________________________________________
136
Name of Customer:
C- Credit Comments / Memorandum
1. Purpose of the Credit Proposal

The purpose should be specified for the request / credit package with respect to status of the proposal i-e Fresh,
Renewal, Enhancement, Reduction, one off etc. It must also state any change in terms and conditions from the
previous approval and also whether fresh approval is required for any matter.
2. Facility Rationale / Justification (Facility Wise)

This section of the proposal should capture purpose of proposed facility, evaluation of requested amount with
respect to production capacity and funding requirement of the client, pricing, value addition through the
proposed arrangement, etc.
Synopsis of last 12 months, containing brief description of changes in credit facilities i.e. enhancements, one-
offs, reductions, any other financial accommodation, should be provided.
For BMR/Capex/ Project Financing, discuss viability of the project.
Discussion should also include rationale for facility restructuring or reduction in existing limits, where
applicable.
3. Financial Summary
Financial analysis – The aim of the financial analysis should be to provide both qualitative/ quantitative
information. Discussion should evolve around account heads reflecting material movements between the two
audited accounts. Stating increase/decrease in amount/percentage should be avoided; the emphasis should be to
uncover the underlying reason(s) which led to the change.
In case of limited companies, Credit officer should try to extract ageing of receivables, evaluate marketability of
stocks in consultation with the client, and highlight any balance sheet mismatch. If material, off-balance sheet
financing / Contingencies/ Commitments to be briefly discussed.
Variance analysis – Emphasis needs to be on explaining underlying reason for the variance (projected numbers
vs. audited numbers)
Projections – It should include projections (Balance Sheet, Profit & Loss and Cash flow) up to one year for
Working Capital Lines and till final adjustment in case of Term Facilities. Sensitivity analysis is required for
term exposures. Covenants should be listed and reason for any breach should be explained including future
course of action to strengthen MCB’s position.
Quarterly accounts – In case of listed public limited companies, latest set of quarterly accounts to be attached
with the credit package (if Credit Proposal is elevated after 4 months from financial year end), and only
significant observations need to be pointed out. Write-up/analysis is not required for quarterly accounts.
CRR - Brief account of key reasons for improvement / deterioration in CRR should be provided.
Balance Sheet and Income Statement: Mention status i.e. Audited/ Unaudited /Certified by Chartered
Accountants but not audited
Balance Sheet 2008 2009 2010 Variance (2010 vs. Reason for Change
(last three years) 2009)
Stocks
Receivables
Other Current Assets
Net Fixed Assets
Other Long Term Assets
Total Assets
________________________________________________________________________
137
Creditors
Short Term Borrowing
Current Maturity of Long Term Debt
Other Current Liabilities
Long Term Debt
Directors’ Loan
Total Liabilities
Revaluation Reserves
Capital
Other Reserves + Retained Earnings
Total Equity
Total Equity+ Liabilities
Income Statement 2008 2009 2010 Variance (2010 vs. Reason for Change
Sales
Gross Profit
Other Income
EBIT
Financial Charges
PAT
Financial Indicator (Ratios) 2008 2009 2010 Variance (2010 vs. Reason for Change
Gross Margin
Net Margin
Interest Cover
DSCR
Current Ratio
Stock Days
Debtor Days
Creditor Days
Total Lib/Equity
Linkage Ratio
Cash Cycle
NOCG – Int. - Tax
Off-BS Financing
Formulas of the above Financial Indicators / Ratios are given in ‘General Guidelines’ attached herewith.
Cash Flows - The emphasis should be more on projected cash flow than historical figures. Analysis should
cover adequacy of operating cash flows to meet funding requirement as well as repayment capacity of external
financing sources and sustainability of cash flows.
4. Industry analysis / Peer analysis

Industry analysis should reflect the current macro environment and expected developments over the medium
term, change in government regulation and its impact on the sector. It must cover the demand and supply
conditions viz a viz price trends of raw material and finished goods, future price expectations, effect of price
trends on industry margins etc. Competition/ Market Positioning of the client shall also be discussed with
respect to size of the concern in comparison to other market players, market share, substitutes, barriers to entry,
key selling point of Product (s) etc.
Peer analysis shall be done for limited companies only and should ideally include comparative analysis with
similar companies operating on similar scale and in same line of business. Peer analysis would also not be
required in cases where comparable firms are not operating.
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138
5. Account/ Group Performance
Following shall be covered while doing the client’s account/ group performance review:
Repayment Track Record
9 Principal, mark-up, PAD, etc of both WC and LT Limits
9 Reasons for any delayed payments.
9 Any restructuring/ rescheduling in past from MCB/ other banks.
9 Adjustment date in seasonal finance.
Delay in Recovery of Mark-up / Instalment (last four quarters)

Q1 Q2 Q3 Q4
In case Facility Utilization is low, explain reasons.

In case ancillary business is less than commitment, explain reasons.
Future Business Commitment. Discuss reasons if commitment is less than expected.
Profitability/ Account Yield (income form FB & NFB limits)
6. Collateral/ Security Analysis

Branch should comment on quality of receivables (ageing) and stocks (saleable value). For financing against
fixed assets, please comment on potential recovery if assets are to be sold under distressed condition.
Furthermore analysis must be provided with respect to exposure versus collateral value (coverage) on both
account and group basis. Any issues highlighted by LAD/ CRC must also be discussed here.
7. Facilities from Other Banks/ FIs

If the client is also availing any financing facility from other financial institution, then particulars of the same
shall be disclosed here.
Bank Facility Limit O/S Security Other terms & conditions/ Information
Total Total Total
8. Risks & Mitigants

Risk Impact on Repayment Ability Mitigants
Financial Risk
Business Risk
Any other Risk
Industry and company specific risks and mitigants to be addressed.
9. Account Strategy
This should be a comprehensive section and should contain relationship strategy based on upcoming
opportunities (state expected time to materialize), any early warning signals, pricing, Capex/BMR, utilization
levels, change in yield, comment if trade business is lower than initially agreed, etc.
Account strategy should end with clear concluding remarks and recommendations (enhance / hold/ reduce / exit)
with regard to request made in credit proposal.
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139
D- Basic Information Record
Customer Information
Customer Background Legal status (i.e. ownership type), date of establishment, brief customer history,
industry and line of business
Plant location and Mention complete address where production facility / factory / mill / trading office /
Business Address head office of the customer are located.
Financed Organization Specify FOT of the customer as per CRMD Circulars issued from time to time
Type (FOT)
Production Base Installed capacity and utilization (current and last year). Indicate if there are multiple
plants / sites. Historical trend of capacity enhancements. Total stock storage capacity
of the customer. Mention the address if stock storage place is other than the plant/
business address
Product Mix Breakup of sales by line of business segregated into local sales / exports
Suppliers List of suppliers; share of each of the top 5 suppliers in the overall procurement of the
client. Credit/purchase terms.
Buyers List of buyers, share of each of the top 5 buyers in the overall sales. Credit sales terms.
Strengths Compared to competing firms
Weaknesses Please propose strategy to overcome any limitation
Stock Market Data If listed on stock exchange, please provide market capitalization, PE ratio, dividend
yield. Compare the numbers with the ones falling on the last CP date
Share Holding Pattern

Directors/Partners /Proprietor Percentage Shareholders Percentage Share
Share
Aggregate shareholding of Directors
Total Total
Mention any material change in shareholding since last year
Company Management
Directors/ Partner/ Proprietor Briefly comment on reputation, capability and vision
Senior / Executive Management Briefly comment on education, experience and ability to execute business and
financial strategies
Access to Management Mention the name and designation of contact individuals and contact details.
Succession Planning Comments on succession.
Mention any change in Directorship / Senior Management since last year
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140
Detail of Deposit Accounts of Borrower
Customer Name:
Group Name:
Detail of All Deposit Accounts (Both Time & Demand) maintained across MCB:
Provide following details for each account
• Title of Account
• Nature of Account
• Account Number
• Branch where Account is maintained
• Date A/C opened
• Current Balance
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141
CREDIT PROPOSAL - TEMPORARY ACCOMMODATION

BRANCH OFFICE BR. CODE REF. NO. DATE
REGIONAL OFFICE CIRCLE OFFICE ACCOUNT NO. DATE A/C OPENED A/C TYPE
1) CLIENT
DIRECTORS/ 1) 4)
PARTNERS / 2) 5)
PROPRIETOR 3) 6)
2) EXISTING LIMITS PROPOSED LIMITS CP EXPIRY DATE (Amount in Millions)
Nature of Facility EXISTING Initial date Proposed Ren/ Mark-up/
Enh. Comm. Margin Expiry Securities Value
Limit Outstanding Limit etc.
Total Fund & Non Fund

3-a) PURPOSE OF BORROWING / TRANSACTION 3-b) REPAYMENT ARRANGEMENT / SOURCE
4) FRESH / ADDITIONAL SECURITIES TO BE OBTAINED : EXISTING Rs.
5) OVERDUE (if any) As on : 6) BUSINESS PERFORMANCE Total Incl. Fresh

Nature of Finance Principal Mark-up YEAR 7) eCIB REPORT
Imports Applicant’s A/C Group
Exports Total
Local L/Cs Overdue
T o t a l …….. Guarantees Default
(Break-up along with maturity dates wherever applicable Debit Turnover 8) PRUDENTIAL RATIOS
to be submitted on separate sheet). Credit Turnover i) Current Ratio
ii) Debt / Equity
9) GROUP POSITION N. F. BASED TOTAL iii)Borr. to Equity
FUND BASED
COMMENTS BY MANAGER / RELATIONSHIP MANAGER RECOMMENDATION / DECISION OF REGIONAL/ UNIT HEAD &
GENERAL MANAGER/ CORPORATE HEAD
Regional Manager/ Unit Heat General Manager

BUSINESS HEAD/ CREDIT HEAT CREDIT OFFICER/ SENIOR CREDIT OFFICER
HEAD OF BANKING GROUP/ RMG MANAGEMENT CREDIT COMMITTEE (MCC)
Head of Banking Group Head of C&RMG

Note: This CP’s must be computer printed / typed.
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142
Appendix V to Chapter 3.3
EARMARKING OF LIMITS
Earmarking of limits can be done after approval is obtained from approving authority on the
following format:
To: (Approving Authority) (Through the concerned General Manager’s Office)
From: (Name of Branch)
Circle:
Name of Customer:
Risk Rating:
Credit Proposal # dated / / (Latest Approval CP).
Re: Request for earmarking of limits for (Full Name of Company).
We are proposing earmarking of PKR-----M as follows:

(Rs. 000)
Brief
Limits Current Outstanding Limits being Proposed Limits (After
No. Type of Facility Security
(AMT) (Including mark-up) Earmarked Earmarking)
Details
1 A X X + --- M
2 B X X
3 C X X
4 D X X - --- M
Total NIL
Period of : (Mention the Date of this Earmarking after which the limits will be reverted to
Earmarking the original).
(Not to Exceed 90 days).
Security : For Facilities A and D (for facilities involved in the earmarking).

- Additional security (if Any)
Branch Manager
________________________________________________________________________
143
Appendix VI to Chapter 3.3
Request for No Objection Certificates

1. Customer Name/ID:___________________________
2. Group Name/ID:______________________
3. CRR__________ eCIB status:_______________
4. Expiry / Maturity of existing limits:______________
5. Are there any past dues in the account? (Y/N)
6. If yes the reasons for the same & justification for the proposed transaction:
_____________________________________________________________________
7. Request details
Name of the Facilities Amount of Description of Other securities
FI’s in whose offered to charge for which the Charge offered by the
favour NOCs to Client which NOC is required (Current or customer to that
be issued required to be Fixed assets) FI
covered
against charge
Total
8. Bank wise analysis of the charge position, as per the description mentioned above.
Name of Primary risk based Charge Ranking Margin Latest O/s

the FI facilities secured held
Including against charge
MCB (current or Fixed) Amount
Total (a) (b) (c)= a/b -

1
9. Encumbrances vs. Valuation of Current / Fixed Assets
Total encumbrances (a)

Value of Current Assets (as per latest (d)
stock / receivable reports). / Fixed Assets
(as per W.D.V or Forced sale value
whichever is higher)
Existing Cushion if any (e)= (a) – (d)
Latest Short / Long term borrowings (f)
Amount of assets (Current / Fixed) likely (g)
to be build up as a result of additional
financing availed or to be availed
Expected Cushion (h)=(e) + (g)
________________________________________________________________________
144
Appendix VII to Chapter 3.3
Check List for Prudential Regulation Compliance

[This list to be kept updated as per changes in PR]
M/s. __________________________ B/o ________________________
Guidelines:-
Answers should be Yes(Y) or Not Applicable (NA) for all the items listed below to be eligible for Bank's financing
unless prior exemption from SBP available on branch record.
(Y/NA)
Check List:-
1 a) Financing facility to the single person (entity) at any point of time shall not exceed 30 percent of
the bank’s unimpaired capital and reserves, subject to condition that the maximum outstanding
against fund based financing facilities do not exceed 20% of the unimpaired capital and reserves.
b) Group’s Total Exposure Limit of 40% & FB only 35% of Banks equity also complied with
(effective from 31-12-2010).
c) In case of SMEs maximum exposure to a single person (entity) do not exceed Rs.75.0M.
2 Approval of majority of directors of MCB's excluding the director(s) concerned obtained as the
borrower fall in category specified in of Prudential Regulation. (Includes persons who may not be
director but hold 5% share). Nor any un-secured Advances allowed to/against guarantee of Bank's
director.
3 a) Clean advances (including against personal guarantees only as well) to the borrower/their
family members from all Banks do not exceed clean lending limit (as per PR & Bank’s Policy) in
aggregate (written declaration obtained as per Prudential Regulation).
b) The purpose of loan, is expressly stated and is for genuine purpose (Applicable for clean
advances as well).
4 a) i) Statement of Accounts / Balance Sheet as required under Prudential Regulation obtained
(audited accounts required where exposure exceeds Rs.10.000M or a limited company. In
case of fully secured against liquid assets, financial statement signed by borrower shall
suffice).
ii) If the borrower is a public limited company and exposure exceeds Rs. 500 million,
financial statements duly audited by a firm of Chartered Accountants which has received
satisfactory rating under the Quality Control Review (QCR) Program of the ICAP.
b) i) Fund Based & Non Fund Based Financing from all Banks / FIs do not exceed 10 times of
equity and Fund Based only 4 times [incl. (i) subordinated debt with subordination
agreement duly signed, & (ii) revaluation reserve up to 3 years from date of revaluation].
ii) In case of seasonal financing up to 6 months, total exposure (FB & NFB) do not exceed
12 times and FB only 8 times of equity of borrower as per above.
NOTE: Not applicable to exposure fully secured against Liquid Assets, Cotton Ginning &
Rice husking units and Export Finance. Where subordinated loan treated as equity
the loan subordination agreement signed by loan provider and the borrower,
confirming that the loan shall be repaid with Bank approval is held.
iii) In case of negative equity, financing do not exceed 4 times of fresh injected equity during
current year and agreement held that customer shall plough back 80% of net profit each
year till able to borrow without relaxation.
iv) In case of SMEs total exposure at all Banks / FIs do not exceed Rs.150.000M (including
leased assets) or Rs.100.000M (excluding leased assets).
(Y/NA)
5 While giving advances against shares / TFCs , bank shall not :
• take exposure against the security of shares / TFCs issued by them.
• provide unsecured credit to finance subscription towards floatation of share capital and issue
of TFCs.
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145
• take exposure against the non-listed TFCs or the shares of companies not listed on the Stock
Exchange(s).
• take exposure on any limited company against the shares/TFCs of that company or its group
companies.
• take exposure against ‘sponsor director’s shares’ (issued in their own name or in the name of
their family members) of banks / DFIs.
• take exposure on any one person (whether singly or together with other family members or
companies owned and controlled by him or his family members) against shares of any
commercial bank / DFI in excess of 5% of paid-up capital of the share issuing bank / DFI.
• take exposure against the shares/TFCs of listed companies that are not members of the
Central Depository System.
• take exposure against unsecured TFCs or non-rated TFCs or TFCs rated below ‘BBB’ or
equivalent.
• minimum margin requirement is 30% of the shares complied with.
• Banks / DFIs shall not hold shares in any company whether as pledgee, mortgagee, or
absolute owner, of an amount exceeding 30% of the paid-up share capital of that company or
30% of their own paid-up share capital and reserves, whichever is less.
7 Classification of Advances, where applicable, is done strictly in accordance with time frame specified
in Prudential Regulation or classification not required. Classification of Restructured / Rescheduled
loan not changed unless terms are complied with, for a period of 1 year (excl. Grace period) and 10%
of Restructured / Rescheduled amount recovered.
8 Reasonable effort has been made to determine true two identities of the borrower/their ownership
and to ensure that Bank's finances shall not be used for any un-ethical purpose.
9 a) eCIB Report obtained and is satisfactory/due consideration given to over exposure/default by
borrower or its group accounts. (Applicable for all exposure irrespective of any amount)
b) In case of SMEs effort made for obtaining Credit Worthiness Report from their association.
10 No issuance of any guarantee or letter of comfort by Bank's is involved for mobilisation of
deposits/Investments Certificates/issue of Commercial paper by any NBFI (Investment
Banks/Leasing Companies/Modarabas/ DFIs) (Prudential Regulation) in this case.
11 Latest Borrower Basic Fact Sheet obtained.
12 Guarantees issued comply with PR & Bank’s Policy (exception in Bank’s Policy, where applicable
obtained from competent authority).
13 In case of Restructured / Rescheduled Loans, loan status not be changed unless all conditions are
complied for one year (excluding grace period) and minimum 10% of the restructured amount is
realized in cash.
14 In case of SMEs, Personal Guarantees obtained from directors / owners.
15 Loans obtained by the borrowers have been utilized for the purpose started and specific purpose for
which loan is being obtained known.
Name, Designation & Signature
Dated:
Note: A separate file / register to be maintained at each branch and check list of all borrower be prepared and kept with
Manager/Advances Incharge of the branch, who shall ensure that the same is kept update
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146
Appendix VIII to Chapter 3.3
PROFITABILITY / YIELD REPORT OF BORROWERS

1. (a) Borrower’s Name (b) Date of
Report
(c) Branch Code Name (d) Period To
Covered
(e) Area Office Ref. No.
2. LIMITS (Amount in Million Rs.)

Mark-up / O/S as on Product of F.B.
Nature of Limit Limit approved Mark-up Earned
Commission Rate Since Jan.
1 2 3 4 5 6
Total F.B. A1 A2
Total N.F.B.
3. a) BUSINESS PERFORMANCE b) EARNING (From Non-Fund Based Operations)

Business / Year # of Tr. Comm. / Income
Imports Comm. On L/Cs
Exports Comm. On G’tees
Import (Local) Comm. On DA Bills
Exchange earning on
Remittances
Imports
Bank Guarantees Exp. Negotiation Comm.
Deposits Comm. On Remittance
T/O Dr. Misc. Income (specify)*
T/O Cr. TOTAL INCOME B
* e.g. monitoring fee, commitment charges etc.
c) DEPOSIT (Including Balance in Margin Account / TDR etc.)

ii) Deposit as on v) Net contribution to
i) Deposit Type iii) Rate of Profit p.a. iv) Product
Br. Income + / (-) **
** Column (iv) x[Average Pool Rate on Debit balance with H.O. – Column (iii)] Total Net Contribution + / (-)
36,500
C
4. CUSTOMER PROFITABILITY (Actual)
Yield of Fund-based Assets (Gross) = A2 ± B ± C = _______ Ps. / day / Rs.1000/= (or *** % p.a.)
Total A1
*** Mark-up Rate x 365 ÷ 10
5. a) FOR APPROVAL
Nature of Limit Normal Mark-up Rate Existing Mark-up Rate Proposed Mark-up Rate
b) 1) Justification for concession in Mark-up Rate, e.g. :-

i) With approval of above, expected yield is = ________ Ps. / day / Rs.1000/= (or _________% p.a.).
ii)
2) Signature of Area Head __________________________
6. Signature of Approving authorities
1.
2.
________________________________________________________________________
147
Appendix IX to Chapter 3.3
SANCTION ADVICE – FORMAT OF A LETTER TO THE CUSTOMER

ADVISING LIMITS
(To be prepared after every credit limits renewal or in case of a new facility)
Ref.
Dated:
M/s. (Name of Customer)
Dear Sir,
Re: SANCTION LETTER FOR (NAME OF BORROWING ENTITY)
We are pleased to advise that the following Credit Limit(s) has/have been made available to you, as approved by
the competent authority till__________.
1. Nature & Amount of Limits(s)
a.
b.
c.
d.
2. Purpose
a. Covenants:
b.
Sanction Advice must capture all covenants, as defined
c. in Approval of Finance, which require performance on
d. part of customer
3. Security(ies) / Collaterals
a.
b.
4. Margin (%)
a.
b. KIBOR BASED MARKUP:
- TPMR: Three Months KIBOR Ask Rate (Average of all
5. Mark-up / Charges Banks) at the first day of each calendar quarter +
a. ____ p.a. spread.
b. - Reset/Repricing Period: Every three months at the
first day of each calendar quarter or earlier at the
6. Validity discretion of bank.
a.
b.
7. Covenants
a) e.g.: Directors loan shall not be withdrawn during tenancy of Banks loan (where applicable).
b) Any change in ownership/strategic control during tenancy of Banks financing shall require bank’s prior
clearance.
c) The customer shall ensure that financial ratios do not fall below the requirement under Prudential
Regulations or as may be specified / subsequently specified by Bank (where applicable).
d) E.g.: While declaring any cash dividend / profit distribution there should be no bank dues in arrears or
prior NOC should be in place (where applicable).
8. Other Terms & Condition(s)
a) The bank reserves the right to add, amend or alter any condition (except those, which are prohibited by
regulator) at its discretion including increase in margin requirement.
b) The Bank Shall, at all times, have full authority to cancel/reduce the facilities allowed without assigning
any reason and to call for adjustment of the liabilities within the period so decided by the Bank.
c) The hypothecated or pledged goods or mortgaged building and machinery must be kept fully insured by
insurance company on Bank’s panel or nominated by bank specifically at all times against the risks of
Fire, Riots, Strikes, Burglary and malicious damage risks with the bank as the mortgagee and yourself
as the mortgagor, and the relevant policy along with premium payment receipt held by us. Security /
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148
watch and ward of assets placed under Bank’s lien shall be your responsibility.
d) Details as per Borrowers Basic Fact Sheet format prescribed by bank shall be provided at least once in a
year and wherever any change in ownership / key management or credit rating or substantial change in
financing arrangement with other Banks / FIs or changes in details of Associated units takes into effect.
e) Stock statements together with a list of book debts are to be submitted at the end of each month, to
reach us by the first week of the following month. The statement / list should provide Bank-wise break
up of outstanding amount with total value of stocks and receivables there against. Bank may require the
statements earlier.
f) The Bank or its authorised representative(s) would have the right undertake inspection of Stocks /
Assets under Bank’s lien from time to time and in any case at least once in each calendar year with or
without prior intimation and you shall be obliged to extend all possible assistance.
g) “The facilities granted are subject to State Bank of Pakistan’s Prudential Regulation / restrictions and
Credit Policies as may be imposed from time to time. These facilities are being offered with the
understanding that your company’s financial condition will comply with these regulations and other
regulatory requirements as well, the compliance of which depends on your actions / performance.”
h) Audited accounts should be submitted to the bank within three (3) months from the date of your
financial year end. Whereas half yearly accounts should be submitted within two (2) months. In both
cases it shall be submitted to the bank within 7 days of its finalization. Any further break up / details or
interim / in-house report required by bank to be provided immediately. Details of liability (fund based &
non-fund / contingent) towards our bank or other lenders shall be appropriately reflected in Annual
A/Cs of the concern & / or note forming its integral part, in appropriate manner with name of the
Bank(s) reflected therein.
i) All levies and taxes now or at any time hereafter levied and payable in respect of the financial
accommodation and banking facilities set out in this letter will be exclusively borne by you.
j) All requisite charge forms to be submitted, duly filled in and signed by the authorised persons. Security
held by Bank against one limit, at Bank’s own discretion, shall be available for other limit(s) of same
entity group entities [tick applicable box(es)].
k) The value of security determined by Bank shall be final. In case the market value of assets placed under
Bank’s lien / pledged shares / pledged or hypothecated stocks, as determined by the Bank, falls below
the specified margin requirement, the customer must provide additional shares / stocks acceptable to
the bank or reduce the finance accordingly, within 3 days of receiving a letter for the same. However, if
the margin falls below 75% of the requisite margin requirement or margin available is less than 10% or
as may be specified by Bank in case of shares or value of stocks / assets held as security falls below the
bank’s exposure, the bank at its own discretion, may sell the same, for adjustment / reduction of
exposure without reference to borrower / customer.
l) During the tenancy of MCB’s exposure or financing arrangement, for any change in directorship – prior
consent in writing must be obtained from the Bank. Otherwise MCB has right to recall the loan /
exposure / financing arrangement immediately.
9. Business commitments to be met during the calendar year are as under:
a) Import
b) Export
c) Remittances / Others
In the normal course you may rely upon the above facility till but you will appreciate that in
accordance with normal banking practice, the facility is repayable on demand and we reserve to ourselves the
right to vary the terms and condition and/or ask for repayment if circumstances arise which in our opinion justify
our doing so.
If you agree with the terms and conditions of this Sanction Advice/Letter, please return the duplicate copy with its
each page duly signed as token of your acceptance of the aforementioned terms and conditions within 15 days
from the date hereof.
Yours faithfully
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149
Appendix X to Chapter 3.3
SECTION A
TRADING / SERVICE CONCENRN
Remarks
1. Core Business of the company
2. Are the total assets of trading/service concern at cost excluding land YES NO
and building less than to Rs.50 Million?
3. Are sales of the concern are not exceeding Rs.300 Million as per latest YES NO
financial statements?
4. Are numbers of employees of the concern not more than 50 persons if YES NO
trading concern?
service concern?
In case answer of question No. 2 to 5 is YES then said concern is SME.
SECTION B
MANUFACTURING CONCERN
Remarks
1. Core Business of the company
2. Are the total assets of manufacturing concern at cost excluding land and YES NO
building less than Rs.100 Million?
3. Are sales of the concern not exceeding Rs.300 Million as per latest YES NO
financial statements?
manufacturing concern?
In case answer of question No. 2 to 4 is YES then said concern is SME.
Note: Please tick mark the YES/NO column and provide actual information regarding core business of
the company in the point No. 1 of both the sections.
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150
Date
Day Month Year
Reference No.
Name of Branch:
__________________________________
__________________________________
Name and Address of Customer:

_________________________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
Outstanding Balance (Principal & Mark-up) as on ________________________:
Amount in PKR
Nature of Approved Outstanding Balance Expiry
S No.
Facility Limit Principal Mark-up Date
1.
2.
3.
4.
Dear Customer,
Please note that outstanding balance of principal and mark-up against the credit facility (ies)
availed by you is indicated above.
In case of any disagreement, contact us within 10 days from the date of this letter.
If, however, we do not receive a response within the time stipulated above, the outstanding
balance amounts as shown above, shall deemed to be correct and confirmed by you.
Yours faithfully,
Branch Manager
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151
PRICING GRID FOR WHOLESALE BANKING GROUP
Proposed Pricing
Sr. No. Category
Tier 1 Tier 2 Tier 3
1 PKR Cash Collateralized Exposure
2 FEX Cash Collateralized Exposure
3 Share Secured Exposure
Non Stock Brokers
Stock Brokers
4 Pledge Based Inc. Import based PKR loans
5 Hypothecation based Lending/TR
6 Post Shipment Exposure
Post Shipment L/C
Post Shipment Contract/Discrepant
(Accepted)
Post Shipment Contract/Discrepant (Un-
accepted)
7 GoP GTEE/GoP backed security/GTEE or
Deposit under-lien with Bank rated
Investment grade and above
8 Term Exposure
Term Loans 3 yrs
Term Loans 5 yrs
Term Loans 7 yrs
Term Loan 10 yrs
Term Loans more than 10 years
9 FE-25 based Lending Import/Export Relevant LIBOR + Spread
(Minimum positive spread to
be notified at the beginning of
each quarter)
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152
PRICING GRID FOR COMMERCIAL BRANCH BANKING GROUP

Sr. No. Category Proposed Pricing
1 PKR Cash Collateralized Exposure
2 FEX Cash Collateralized Exposure (Advances Against Lien on MCB's * MARK-UP: Relevant ask KIBOR/ relevant Benchmark + Spread (Minimum
FCY Deposit Receipts / Certificates under FE-25) positive spread to be notified by the Group Head at the beginning of each quarter).
RESET FREQUENCY: Must match the relevant ask KIBOR tenor.

3 Share Secured Exposure
Non Stock Brokers
Stock Brokers
4 Pledge Based Exposure (Including Import Based PKR Loans)
Pledge Based (Textile / Refined & Raw Sugar / Wheat / Rice &
Paddy / Steel)
Pledge Based (Others)
5 Hypothecation Based Exposure / TR
6 Post Shipment Exposure MARK-UP: Relevant ask KIBOR + Spread (Minimum positive spread to be notified
Under LC by Group Head at the beginning of each quarter).
Under LC (Discrepant Documents)
Under Contract / Firm Orders
7 GoP Backed Exposure / First Class Bank Guaranteed Exposure
8 Term Exposure RESET FREQUENCY: Must match the relevant ask KIBOR tenor.
Up to Three Years
Up to Five Years
More than Five years
9 GoP Backed Exposure / First Class Bank Guaranteed Term
Exposure
Up to Three Years
Up to Five Years
More than Five years
10 FE-25 Based Lending (Import / Export)
MARK-UP: Relevant LIBOR + Spread (Minimum positive spread to be notified by
Group Head at the beginning of each quarter).
RESET FREQUENCY: Must match the relevant LIBOR tenor.
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153
SHARE OF WALLET ANALYSIS
Share of
Total Wallet MCB's Share
Revenue Item Wallet
(PKR Million) (PKR Million)
(%)
Income from Short Term Loans

Income from Long Term Loans
Income from Trade Loans
Commission on LC's/ LG's/FX, etc.
Investment Banking related fees
Any other sources
Total
Share of Wallet = MCB's Share / Total Wallet
Cross Sell Ratio = Non Lending Revenues / Lending Revenues
Yield of Account = (M/Up Income + Non-M/Up Income) / Total Products (of

Fund Based Facilities)
154
Credit Proposal Process Flow (With CRC Support)

Processing of Credit Proposal Credit Proposal Rejected Credit Proposal Approved
Customer
Application of Finance
Reviewing Authority Approving Authority Credit Risk Control Originating Business Unit
Approval of Finance
Credit Proposal Preparation
along with Credit Proposal Returned
recommendations
Copy of Approval of
Finance
Comments on Page
3 of Credit Proposal
Copy of Approval of
Credit Proposal Returned Finance
Decision by Approving
Authority*
Pre-Fact Review by Reviewing

Authority*
155
Reviewing Authority Approving Authority Originating Business Unit Customer
MCB Bank Limited
156
Credit Handbook
Facility Advising Letter (CRC Support)

Customer
FAL for
acceptance by
customer
Approving /
Reviewing
Authority
Credit Package
Credit
Approved with all

related
Documents
Business Unit
To Business Unit
Accepted FAL
Business Unit for joint signatures
Yes received Original
accepts Draft & acceptance by
sent to CRC
Borrower
No => Returned for

modification
Change
Accepted FAL
request differs
No FAL Prepared filed in
with original
Safe Custody
CA
CRC
Draft FAL is
Prepared as per
approved Package
157
Items Details / Areas that should be discussed
Executive A brief overview of PPM summarizing key points.

Summary
Launch A deadline Expected date for launch of the product to ensure that analysis of the
Timelines product and its associated risks should be valid
Glossary A list of technical terms with their definitions used in the PPM.
Target Market This section should describe the target market in detail and cover the following
items:
• Size & segmentation of the target market
• % age of the target market anticipated to be targeted
• Statistics / research on the target market (refer source if possible)
• Exclusions :
- Non Targeted customers
- Negative list of segments / professions
- Geographical Areas (Example: FATA)
Product This section should discuss rationale for launch of product and potential pay-off.
Description This will include:
• Product features in line with target market segmentation
• Distinctive competence/ uniqueness of product
• Overall fit of the product within MCB’s existing product portfolio
• Effect of this product on MCB’s image
• Future potential for expansion
Products This section should discuss material parameters of the product that will include:
details • Eligibility Criteria
• Account Initiation (Screening)
• Account Maintenance
• Pricing (Effective annual return)
• Limits (Maximum & Minimum)
• Security structure
• Tenure (Maximum & Minimum)
• Application approval process (Minimum criteria for risk acceptance and rules
for approval)
• Approval Grid (This should also include deviation approval level)
• Collection policy
• Write off policy
• Early Redemption policy etc.
Documentation This section should provide details of documentation required for the product.
This should include:
• Documentation standards and any variances thereto
• List of documentation required
• Draft of agreements
• Legal opinion from Legal Affair Division on the adequacy and completeness of
the standard documents.
Loan booking, This section should explain where these loans will be booked and what would be
Maintenance the responsibility schedule for performance of various tasks.
and
responsibility
schedule
Economic & This section should discuss:

Competitive • Overall economic situation
Environment • Primary & Secondary competitors. Which organizations have offered a similar
product in the past, from what date, and what has been their experience with
the product?
• What specific losses have been associated with this product or similar
products, Please list the five largest such losses with a brief description of the
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158
circumstance surrounding each event.
• A comparison of competing banks (at least three) on major elements like limit,
pricing, tenure, approval process etc.
• Competitors product stage
(rapid growth / stable growth / mature / declining)
• Likely response of competitors of the new product
• Cannibalization effect, if any
Financial This section should provide the business plan in quantitative terms and include the
forecasting/ following:
Business Plan • Initial launch expense
• A detailed financial forecast in terms of
Revenues
Expenses (Fixed & variable)
Profitability / yield
Delinquencies & write offs
(Please provide region wise break-up)
Stress Testing Sensitivity analysis by varying key assumptions. This section should incorporate
three scenarios - optimistic / most likely / pessimistic.
Program Caps This section will include limits on the size of program or any other parameters in
the initial phase.
Program This section should define a process to ensure compliance with any applicable
Compliance program limits and other parameters (regulatory as well as internal).
Marketing Details of marketing strategy for new product and distribution channels.
strategy &
Distribution
channel
Staff required Details of human resource requirements, availability, specialized training
& Human requirements, succession planning etc.
Resource
policy
Potential risks This section should discuss Key Risk Areas that arises due to unique nature of
involved and product and risk mitigants thereto.
strategy
Legal, New product should be in compliance with SBP regulation and in conformity with
regulatory & MCB’s loan policy. This will be responsibility of business unit initiating the
policy request.
compliance
Accounting • Detailed accounting entries for guidance purposes
Procedures & • New account codes to be introduced in the systems
Entries
MIS reports & • An appropriate MIS system for the product program should be designed to
portfolio ensure availability of information for decision making.
Management
• IT system & database source should have ability to:
Disaggregate performance at various levels
Provide aggregate exposure on product &
individual transaction
Establish standard reporting system
• Attach formats of reports that will be generated on an on-going basis based

on dummy data.
• The product program should incorporate a provision for reporting MIS to

RMG on a regular basis.
Exit Strategy The PPM should incorporate an exit process for the product in the event that the
product is required to be dis-continued by the approval authority.
Details of how the existing exposure will be reduced to nil, what is the expected
cost, time and other resources required to ensure a smooth exit need to be
mentioned.
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159
AREA’S RELATED TO OPERATIONAL RISK
Procedure • Confirmation that procedure manuals have been developed / exist for all the
Manuals activities related to the product.
• List of all such manuals.
• Approving Authority for each of these manuals
List of internal Business unit initiating the new product request shall provide list of internal
controls controls that exist as part of various procedures. Internal Controls include
financial, operational, and compliance related controls.
Outsourcing In case outsourcing is involved, details of such activities and risks involved should
Arrangements be provided.
Insurance Insurance arrangements relating to new products should be specified

Arrangements
Vendors Selection criteria of vendors
IT Architecture • Brief overview
& system • Capacity to monitor performance and regulatory parameters
Support • Capacity to monitor portfolio parameters
• Contingency planning/ disaster recovery planning
Reporting of MIS should have capacity to provide the following reports at periodic intervals/ at
Operational time of annual review:
Losses &
Control a) Operational Loss Report
Breaches b) Control Breaches Report (where loss has not been incurred but control has been
breached)
Operational loss is defined as the loss resulting from inadequate or failed internal
processes, people and systems or from external events. Operational losses needs to
be classified in the following seven event types:
¾ Internal Fraud
¾ External Fraud
¾ Business Disruption and System Failure
¾ Damage to Physical Assets
¾ Execution Delivery and Process Management
¾ Client, Product, and Business Practices
¾ Employment Practice and Work Place Safety
Format of reporting operational losses shall at minimum include the following fields:
a) Detail of loss incident (including analysis of cause)
b) Date of incident
c) Risk Event Type
d) Branch/ Office
e) Amount of loss
f) Recovery through insurance
g) Recovery through other sources
h) Future Recovery Plan
Format of reporting control breach information shall at minimum include the

following fields:
i) Detail of control breach incident (including analysis of cause)
j) Date of incident
k) Risk Event Type
l) Branch/ Office
m) Frequency of incident
Severity of potential loss (Low/ Medium/ High)
Signoffs Listing of BU/SF Group Heads whose sign-offs/recommendations are required
before presentation of the proposed program to Board nominated committee for
approval
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160
Credit Handbook
Section 4
Management of
Deteriorating Credits
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161
Section 4
Management of Deteriorating
Credits
4.1 Defining Default
4.2 Watchlisting Policy
4.3 Provisioning Policy
4.4 Write-off and Rescheduling / Restructuring

Policy
4.5 Special Assets Management
4.6 Monitoring
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162
4.1 Defining Default

4.1.1 Definitions
4.1.1.1 Overdue But Not Classified -

OBNC
4.1.1.2 Watchlist
4.1.1.3 Default
4.1.2 Scope of Default
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163
4.1.1 Definitions
At MCB, default and other loan classifications shall be governed by the following
definitions.
4.1.1.1 Overdue But Not Classified - OBNC

If a client fails to service mark-up / interest and / or principal within 30 calendar
days from the due date, it should be classified as OBNC. In case of trade bills
(import / export), if a client fails to adjust the same within 10 calendar days from
the due date, it should be classified as OBNC.
4.1.1.2 Watchlist
Watchlist Account is one that has risks or potential weaknesses of a material
nature requiring monitoring, supervision or close attention of the management but
has not yet been classified as Substandard or worse as per State Bank of
Pakistan’s Prudential Regulations.
4.1.1.3 Default
A default will be deemed to have occurred with regard to a particular obligor when
either or both of the following two events have taken place.
• If a client fails to service mark-up / interest and / or principal within 90

calendar days from the due date or as defined in Prudential Regulations from
time to time, it should be classified as Default. In case of trade bills (import /
export), if a client fails to pay within 60 calendar days from the due date, it
should be classified as Default.
• The bank considers that the obligor is unlikely to pay its credit obligations to
the bank in full, without recourse by the bank to actions such as realizing
security (if held).
An obligor’s un-likeliness to pay can be characterised by the following:
• The bank puts the credit obligation on non-accrual status.
• The bank makes a charge-off or account-specific provision resulting from a

significant perceived decline in credit quality subsequent to the bank taking on
the exposure.
• The bank sells the credit obligation at a material credit-related economic loss.
• The bank consents to a distressed restructuring of the credit obligation where

this is likely to result in a diminished financial obligation caused by the material
forgiveness, or postponement, of principal, mark-up / interest or (where
relevant) fees. This also includes allowing of Forced finances, Temporary
overdrafts / extensions etc.
• In case of overdrafts, an obligor has breached an advised limit or has been

advised of a limit smaller than current outstanding.
• Occurrence of a specific event of default under a contract.
___________________________________________________________________________
164
For defaulted clients, the Risk Rating (RR) of the client should be downgraded as per
the classification criteria.
In case a finance agreement specifies ‘Event(s) of Default’, Default would be deemed on

the occurrence of such event(s).
The following events shall override any / all of the above.
• SBP Inspection declares an obligor to be in Default (on subjective basis or

otherwise).
• A change in the regulatory definition(s) of Default.
In case of sovereign exposures, declaration of default by International Rating Agencies

and / or Bilateral / Multilateral Lending Agencies shall constitute an event of default.
4.1.2 Scope of Default
As a matter of policy, for all exposures the bank will treat default at the obligor level
rather than at the facility level, i.e. default on one facility shall be construed as
default on all facilities of the obligor. All other facilities of such an obligor shall at
least be classified into the same category as that of the obligor’s defaulted facility,
except for Trade Bills, which will be classified as per SBP PRs only. In case of
default on Trade Bills, other facilities shall not be classified. However, on a case to
case basis, Business Group Head may allow to classify other facilities in case of
default on Trade Bills.
The above shall also apply to facilities subjectively classified by either SBP or MCB,
irrespective of the reasons for the subjective classification.
Relevant Business Group Head shall have the authority to allow exception to the
above. The relevant Business Group Head shall also have the authority to treat
default on Group Obligor basis with the concurrence of Group Head RMG, provided
authentic group data is available.
The above mentioned ‘definition of default’ and ‘scope of default’ shall also be
applicable to Consumer Lending.
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165
4.2 Watchlisting Policy
4.2.1 Introduction
4.2.2 WAR Committee Levels
4.2.3 Watchlist Symptoms
4.2.4 Watchlist Reporting
4.2.5 Responsibility for Declassification
4.2.6 Documentation Review
4.2.7 Revaluation of Properties Held as Security
4.2.8 Remedial Actions
4.2.8.1 Immediate Actions
4.2.8.2 Further Investigations
4.2.8.3 Relationship Strategy
4.2.9 Annual Review
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166
4.2.1 Introduction
A Watchlist Account is one that has risks or potential weaknesses requiring

monitoring, supervision or close attention by the management but has not yet been
classified as per State Bank of Pakistan’s Prudential Regulations. However, there is
a probability that the same will be classified as such at a future date.
In no way categorization of an account as Watchlist implies that the account is in a

workout situation or a case for the Special Assets Management Group. Watchlisting
also does not mean that field should stop doing business with a particular client or
stop draw-down in an account. It only entails a higher level of vigilance. Watchlist
categorization only reflects weaknesses in credit quality, which need to be
addressed. Also, it requires an assessment of the borrower’s ability to rectify the
problem within a reasonable time frame, and thus, improve its position as a
borrower. The Watchlisting process is to be used as a monitoring tool for credits
requiring greater management attention.
The bank recognizes that some credit decisions, despite being undertaken properly
and prudently, may still go wrong. The early detection of deterioration in credit
quality and prompt reporting of such early warning signs are evidences of the
proper exercise of account management responsibilities and will not be seen as a
weakness in executing credit responsibilities.
Early identification and prompt reporting of deteriorating credit signs enable swift
action to protect the Bank’s interest. Moreover, early discussion with customers
will enhance the likelihood of developing strategies mutually acceptable to both the
customer and the bank.
As per time based classification guidelines of Prudential Regulation (PR) of SBP, the
first level of classification, i.e. Substandard is triggered only once the borrower fails
to repay mark-up / interest, or principal, within 90 days from the due date.
Obviously, the reasons and symptoms in respect of a borrower’s inability to meet
its commitment have occurred much earlier.
The essence of good credit management lies in early problem recognition, leading
the bank to take corrective measures to protect asset quality through prompt
remedial action (tighter structuring of facilities, strengthening of security position,
etc.). Therefore, in order to protect and improve the quality of the bank’s portfolio
through effective monitoring, a more pro-active approach needs to be adopted. An
early warning system in the form of “Classification Watchlist”, as delineated below,
is to cover the gap between Regular and Classified categories. No provisioning is
required in Watchlist category.
As soon as the account is classified as Watchlist, the risk rating14 should be

amended as per Rating Scales defined in Section 2.6.
14 Please refer the Chapter on External and Internal Credit Ratings
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167
4.2.2 WAR Committee Levels
WAR Amount Frequency

WAR Committee Levels
Levels (Total Exposure) of Reviews
Relevant Business Head / Corporate
For amounts up to Head - Chairperson
1 Quarterly
PKR 15M General Manager
Relevant Credit Officer(s) (CO2 or CO3)
Relevant Senior Credit Officer 1 –
Chairperson
For amounts
Relevant Business Head
2 between PKR 15M Quarterly
Relevant Credit Officer
and PKR 50M
Nominees from LAD and SAMG*
Manager NPL – CRRS*
Group Head RMG / SCO3 - Chairperson
For amounts
Relevant Business Group Head
between PKR 50M
Head of Special Assets Management
and;
Group*
3 PKR 200M for Quarterly
Relevant Senior Credit Officer 2
CBBG PKR 750M
Relevant Corporate / Business Heads
for WBG
Nominee from LAD*
President - Chairperson
Head of Risk Management Group
For amounts more Relevant Business Group Head
than PKR 200M for Head of Special Assets Management
4 CBBG and PKR Group* Quarterly
750M for WBG. Relevant SCO-2 / SCO-3
Relevant Corporate / Business Heads
Nominee from LAD*
*= They are not permanent members. Chairperson of the relevant WAR committee level
shall have the authority to call upon these nominees on as and when required basis.
Relevant Credit Officer for Level-1, relevant SCO-1 for Level-2, relevant Senior
Credit Officer 2 for Level-3 and Level 4 shall be the coordinators and responsible for
conducting the meetings, recording minutes of the meetings, circulating decisions
of the meetings and following up for compliance.
Reviews by WAR committees will be conducted on quarterly basis. Coordinators for

various WAR levels shall be responsible for data compilation from relevant business
units. The final decision making authority for all WAR committees shall be the
designated Chairperson. Watchlist reports, after sign-off by the chairperson should
be circulated to all concerned for compliance and should be held on record (at the
Chairperson’s Office) for future reference.
Furthermore, to facilitate the watchlist process, WAR Committee reviews may also
be conducted through electronic means (e-mails, video conference, conference calls
etc.).
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168
4.2.3 Watchlist Symptoms
• In Watchlist account, the obligor exhibits deteriorating trends / symptoms,

which could jeopardize repayment of its obligations, as due, if not corrected.
• If these deteriorating trends / symptoms persists over a period of time and are
deemed to be of a permanent nature and/or the account has been on Watchlist
category for a period greater than 6 months then in such a scenario the relevant
WAR Committee level must take a decision on the fate of the
account/relationship (i.e. further downgrade the account to substandard or
continue with watch-list category or declassify it to regular status depending on
the nature and severity of the symptoms.
• Indicative list of symptoms:
o Diminished marketability and / or value of collateral

o Material documentation problems
o Inability to clean-up the facilities
o Frequent overdues/excesses over limit/creation of forced finance
o Diversion of loan proceeds/Excessive inter-company lending(s)
o Industry-specific, economic, and/or political problems, affecting the obligor’s
performance
o Declining revenues / profitability
o Tightening liquidity or cash flow or late payment of mark-up / instalment
due or considerable increase in days payables
o Increasing leverage and/or weakening net-worth
o Concerns about the obligor’s management competence, or depth
o An inability to obtain current financial information
o Exhibit adverse trend in sales and cost of goods sold
o Significant increase in receivables and inventory build-up with declining
sales
o Violations of loan/approval terms
o Any other event which reflect probability of account going bad
It is not an exhaustive list and they do not necessarily merit classification of an

account into Watchlist category. However, the Relationship Manager / Branch
Manager and Regional Manager / Team Leader (jointly) must document the
reason for not classifying an account into Watchlist category when some of
these symptoms exist. Since the above mentioned symptoms are not an all-
inclusive list, Field / Relationship Managers must use their judgment in
identifying symptoms which merit classification of an account into Watchlist
category.
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169
4.2.4 Watchlist Reporting
The responsibility for promptly identifying any deteriorating signs in the credit
quality and categorizing an account to Watchlist and updating the Credit Risk
Rating is the responsibility of the concerned Relationship / Branch Manager
countersigned by Regional Manager / Unit Head. Continuous monitoring of
Watchlist accounts shall also be the responsibility of the concerned Relationship /
Branch Manager and Regional Manager / Unit Head. This classification will be
approved by the Credit Approval Authority / Head of concerned Business Group for
the respective customer/relationship.
If the concerned Credit Approval Authority / Head of concerned Business Group

does not approve the classification of the account as Watchlist then this decision
must be documented along with the justification. Related copies of correspondence
must be placed in the credit files for record.
Copy of decision regarding watchlisting must also be endorsed to the concerned

review authority for information along with watch list report. The concerned review
authority can downgrade an account to Watchlist category at his/her discretion.
The Relationship Manager / Branch Manager must review their respective

portfolios on continuous basis to ensure that if relevant symptoms exist then
accounts should be classified to Watchlist category. Besides, watchlist report
(Appendix I to Chapter 4.2) for individual account/relationship must be submitted
within a reasonable time (maximum one month) after identification / occurrence of
Watchlist symptoms as per the judgment of Relationship Manager / Branch
Manager. The Watchlist Report as per Appendix I to Chapter 4.2 (along with CRMIS
format Set-up Sheet) is duly submitted to the relevant approving authority.
It is strongly advised that a decision by the approving authority regarding

classification of an account to Watchlist status should be taken within 7 business
days from the date of initial receipt of Watchlist report. This would facilitate in early
identification of Watchlist account and would also expedite implementation of WAR
Committee’s strategy for the account.
A separate database should be maintained of the Watchlist accounts at the

respective business groups and SCOs. This would facilitate monitoring, reporting
and follow-up at all levels.
Audit / RAR can advise business groups to downgrade accounts to Watchlist

category. In case the relevant business group disagrees with Audit / RAR
downgrade recommendation, the matter shall be decided at WAR Committee level
during the quarterly meetings.
The frequency and circulation of reviews for accounts on Watchlist category will be
as per the WAR Committee Levels as detailed above.
For WAR Levels 2 and 3, the Watchlist reports shall be forwarded to the relevant
coordinator ; who shall consolidate the information and forward the Watchlist
Summary Report (Appendix-II to Chapter 4.2) to the relevant on quarterly basis.
Copies of the Summary Report should also be endorsed to the relevant Business
Group Head and Head ARAR.
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170
The SCOs shall forward the Summary Report for review to WAR Committee Level-3
and 4 through Group Head Risk Management.
4.2.5 Responsibility for Declassification
An account may be declassified to regular from Watchlist status after carrying out
analysis as per Appendix-III to Chapter 4.2 when the symptoms causing the
Watchlist classification have been regularized or no longer exist. This must be
initiated by the relevant business group.
• The authority for declassification of an account from Watchlist status to regular

status will vest in next higher level in the approval / review level.
• Once the account/relationship has been classified as sub-standard or worse as

per SBP Prudential regulations, it is understood that risk rating of such account
shall be updated accordingly and simultaneously excluded from the watch list
category.
4.2.6 Documentation Review
• As soon as an account is Watchlisted, on the spot verification of property /

assets held as security / collateral and verification of ownership from relevant
land authority’s records shall be arranged by the business.
• Subsequently, business shall immediately arrange legal review of all limit /

security / collateral documentation. For branches where CRC is present, such
legal reviews shall be arranged by CRC upon the business’s request.
• Results of the legal review shall be reported (as part of the Watchlist Report -
Appendix-I to Chapter 4.2) by the business and shall form the basis for decision
among alternative courses of corrective action. If any deficiency is discovered,
business shall arrange immediate rectification of the same. Specific target dates
for rectification shall also be provided in the Watchlist Report.
• As a minimum, the following information shall be included in the Watchlist

Report and all credit requests initiated after Watchlisting an account.
Security audit completed on (Date);

by (insert name of lawyer or Legal Firm);
(all securities are complete, in order and enforceable) / (securities are complete,
in order and enforceable except for the following: list deficiencies and expected
completion date(s) of each security); and
Comments of previous watch list review (where applicable) and update on
shortcoming/s
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171
4.2.7 Revaluation of Properties Held as Security
Relationship/Branch Managers are supposed to get the property re-valued, only if

the property held as security has not been valued within the last 18 months by an
authorised valuer and/or approval/review authority is not satisfied that the value
ascribed can still be relied on. The above condition for valuation can be waived by
the Chairperson of the relevant WAR committee level, subject to confirmation by
the BM / RH, based on physical visit, that the existing valuation of the property
still holds good. However, as soon as a loan is classified its Forced Sale Valuation
(FSV) as discussed in subsequent section be arranged by concerned
relationship/branch manager from PBA approved evaluator enlisted with MCB
Bank for FSV.
4.2.8 Remedial Actions
4.2.8.1 Immediate Actions

As soon as a client is Watchlisted, the following measures shall be considered.
• Client Call15
• Ensuring that no excess have been allowed.
• Advising other branches / units known to have contact with the customer or
related entities. Step must always be taken at the appropriate level ensuring full
confidentiality.
• Checking that all documents (including transaction related & other

documentary requirements like insurance etc.), are complete and in order.
• Checking effectiveness of mucaddum arrangement (if applicable).
• Higher offices in the Business Group are informed accordingly.
• Procurement of latest audited / management accounts and analyse the same

vis-à-vis his overall liabilities in order to determine client’s capacity to settle the
obligations.
• Request for fresh eCIB report or external credit report to ascertain the position
of customer’s outstanding overdues with other banks.
• Monitor further facility utilizations in the accounts and consider blockage of the
unutilized lines depending upon the situation (if considered necessary).
Note: This is not an exhaustive list and other measures may also need to be
considered.
15 Please refer the Chapter on Credit Investigation
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172
4.2.8.2 Further Investigations
Further investigations on the bank’s exposure should be carried out, covering the
following:
Loan Review: Once the overall debt burden of the borrower has been ascertained
and debt repayment capacity has been analysed then the account can be reviewed
for any amendment in security structure, facility structure, pricing, deferrals,
waivers and loan covenants.
Checking of Security Documents / Charge Forms: This have been discussed in

detail in the section on Documentation Review.
Securities to be checked: All type of securities under charge/lien of Bank should be

examined, assessed, evaluated, to find out the net realizable value. Shortfall, if any,
should be ascertained. Ensure that stock inspection has been conducted as per
specified schedule.
Determine Borrower’s Liability / Outstanding: Borrower’s exact liability, including

mark-up / interest should be correctly determined. Branches should avoid
applying mark-up on the finances not permissible under NIB System or which are
not recoverable as per agreement/terms of loan.
Analysis of all related Security Factors: Financial status / position / means of all
partners / proprietor / guarantors and their assets, both movable and immovable,
should be investigated and taken into account.
Spot Checks of Company's Premises: On-the-spot inspection/ review of client’s

premises and inventory/ receivables should be undertaken by Business Units to
have first-hand knowledge about actual financial position and operational
condition.
Causes of Business Failures: Probe into the causes of Watchlist symptoms should
be conducted. It may be either due to overtrading, poor management,
mis-management, adverse market conditions / product changes, competition, over
concentration of business in few hands / market, etc. This would help in arriving at
a correct, rational decision.
4.2.8.3 Relationship Strategy
An overall assessment of the borrower, based on the strength and weaknesses of

the credit is the key element in determining the relationship strategy to be adopted.
This should enable the bank to adopt a “Maintain”, “Reduce” or “Exit” strategy
based on (but not limited) to the following factors:
Maintain: Where the weakness is of temporary nature and the obligor has the
capacity to overcome these problems, where the obligor is willing to rectify
deficiencies (operational or financial) and takes steps to ensure that the bank is
adequately protected. (“Maintain” strategy).
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Reduce or Exit: Where the repayment capacity of the borrower is in doubt and the
bank anticipates deterioration in the classification indicators, or the default is
wilful in nature, a work-out strategy (“Reduce” or “Exit” strategy) should be
implemented depending upon an assessment of the situation. In case this strategy
is adopted, the bank could either:
• Reschedule/ restructure the facilities
• Work-out with formal rescheduling/ restructuring
• Opt for an immediate/ phased exit from the relationship
4.2.9 Annual Review
Annual review of all watchlisted accounts shall be conducted at one level higher
than the original approval/review level.
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4.3 Provisioning Policy
4.3.1 Introduction
4.3.2 Provisioning for Loan and Lease Losses
4.3.3 Submission of Returns
4.3.3.1 Submission Deadlines
4.3.4 Timing of Creating Provisions
4.3.5 Reversal of Provision
4.3.6 Verification by the Auditors
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4.3.1 Introduction
The allowance for loan and lease losses, usually referred to as the “reserve for bad
debts”, is a reserve established and maintained by charges against the bank’s
operating income. As a reserve, it is an estimate of uncollectible amounts that is
used to reduce the book value of loans and leases to the amount that is expected to
be collected. As per policy the bank follows the instructions of SBP in this regard.
The allowance, which is a reserve, exists to cover the loan losses that occur in the
loan portfolio. Adequate management of the Loan Loss reserve is an integral part of
a bank’s credit risk management process.
Further, all fund based financings under litigation must be downgraded to “Loss”
irrespective of the applicable time based classification criteria. However, the same
is not mandatory for consumer financing litigation cases other than consumer
mortgages (Pyara Ghar, Business Sarmaya etc.) and personal needs based cash
collateralized lending (cash for cash etc.).
In all cases (e.g. programme based lending) where internally approved specific
provisioning requirements are in excess of the regulatory requirements (i.e. internal
provisioning requirements are more conservative than regulatory requirements),
internal requirements shall be followed.
4.3.2 Provisioning for Loan and Lease Losses
As per SBP instructions the banks must establish an allowance for loan and lease
losses (for classification and provisions there-against). Classification and
Provisioning shall be done in accordance with the governing SBP Prudential
Regulations.
In addition to the time bound criteria as prescribed, bank is also required to

perform subjective risk assessment of the performing and non-performing portfolio
where considered necessary. Relevant review authority or Internal Audit & RAR,
during their respective review, can classify an account on subjective basis.
Bank shall classify loans / advances portfolio and make provisions in accordance
with the prescribed SBP criteria. However, where bank wish to avail the benefit of
collateral held against loans / advances, same can be considered in accordance
with the SBP PRs and guidelines.
4.3.3 Submission of Returns
As per requirement of Prudential Regulation PR-8 for Commercial & Corporate

clients, the bank shall submit the borrower-wise annual statements regarding
classified loans / advances to the Banking Inspection Department.
• CRRS will be responsible for Consolidation and timely submission of the

borrower-wise annual statements regarding classified loans / advances to SBP.
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• The same borrower-wise annual statements regarding classified loans /

advances will also be sent to all pertinent Circles / Area Corporate Offices/
SAMGs/ Consumer Assets Division for updating of data / information.
• All circles/ Area Corporate Offices/ SAMGs / Consumer Assets Division are
required to submit the revised borrower-wise annual statements regarding
classified loans / advances to CRRS on every quarter end for consolidation and
onward submission to SBP.
4.3.3.1 Submission Deadlines

Classification of NPLs to be updated monthly as per the SBP’s PRs/guidelines and
management’s instructions.
• Branches / SAMG Units/ Consumer Assets Division/Nelson Chamber’s Staff

Loans Office/Overseas Operation Units to update classification, for the position
as of month-end and reconcile the same with GL. The branches will then
forward the CRMIS data to their respective circle offices for
validation/consolidation within 2 days after each month end. The circle offices
will ensure that branches have correctly reported the data in CRMIS and the
same reconciled with GL Balances. In case of any variance, the data will again
be reverted back to the respective branch by the circle for correction of the
same. After receipt of the revised CRMIS data from branch/es, the circle office
will consolidate the same for onward submission to CRRS through Web Portal
within 3 days after each month end. In order to improve the data quality and
reconcile the data with GL balances, the reports should be duly signed by
respective designated officers.
• December end Classified Advances list shall also be provided to the respective
Audit Centre by Circle Offices for their counter signature, to be finalized within
7 days of the year end. Any change consequent to Audit’s counter signature
shall be advised by Circle Offices to CRRS within 10 days of year end.
4.3.4 Timing of Creating Provisions
The bank shall review, at least on a monthly basis, the collectability of their loans /
advances portfolio and shall properly document the evaluations so made. Shortfall
in provisioning, if any, determined, as a result of quarterly assessment shall be
provided for immediately in their books of accounts by the bank on quarterly basis.
At the end of each quarter the final borrower-wise annual statements regarding
classified loans / advances will be submitted to FCG for creation / reversal of
provisions (if required).
4.3.5 Reversal of Provision
In case of cash recovery, specific provision held against classified assets shall be
reversed subject to the following:
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• In case of Loss account, reversal may be made to the extent that the remaining
outstanding amount of the classified asset is covered by minimum 100%
provision.
• In case of Doubtful account, reversal may be made to the extent that the
remaining outstanding amount of the classified asset is covered by minimum
50% provision.
• In case of substandard accounts, reversal may be made to the extent that the
remaining outstanding amount of the classified asset is covered by minimum
25% provision.
Further, the provision made on the advice of State Bank of Pakistan shall not be
reversed without prior approval of State Bank of Pakistan, including those related
to fully adjusted accounts.
4.3.6 Verification by the Auditors
The external auditors as a part of their annual audits of bank shall verify that all
requirements of Prudential Regulations for classification and provisioning for assets
have been complied with. The State Bank of Pakistan shall also check the adequacy
of provisioning during on-site inspection.
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4.4 Write-off and Rescheduling /

Restructuring Policy
4.4.1 Definitions
4.4.1.1 Write-off
4.4.1.2 Reversal
4.4.1.3 Waiver
4.4.2 Process for Write-off the Debt
4.4.2.1 Full Write-off

4.4.2.2 Partial Write-off
4.4.2.3 Criteria for Write-off
4.4.2.4 Accountability
4.4.2.5 Pre-Audit
4.4.2.6 Forced Sale Valuation
4.4.2.7 Prior Approval from SBP
4.4.3 Rescheduling / Restructuring
4.4.4 Authority for Write-off / Remission
4.4.5 Security Redemption
4.4.6 Abandonment of Collection and Recovery

Efforts
4.4.7 Data-base of Defaulters / Defaulters List
4.4.8 Financing to Defaulters
4.4.9 Lessons Learnt
4.4.10 Reporting
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4.4.1 Definitions
4.4.1.1 Write-off
In respect of the following receivables from the borrower (i.e. recorded as assets of
the bank), any financial relief given on account of:
• principal amount outstanding; and/or
• mark-up, in case of non-classification of relevant loan account, credited as
income in any previous financial year; and/or
• non-mark-up incomes (fees, commissions, etc.) credited as income in any
previous financial year; and/or
• Other charges, i.e. other than the above categories (e.g. litigation charges,
miscellaneous charges, etc.).
4.4.1.2 Reversal
In respect of the following receivables from the borrower (i.e. recorded as assets of
the bank), any financial relief given within the same financial year in which the
income corresponding to these receivables was credited:
• mark-up, in case of non-classification of relevant loan account; and/or
• non-mark-up incomes (fees, commissions, etc.)
4.4.1.3 Waiver
Any financial relief given in respect of mark-up and/or non-mark-up incomes (fees,
commissions, etc.) and/or other charges contractually or legally due on the
borrower but not yet or any longer recorded as assets of the bank. Therefore,
financial relief in respect of mark-up amounts due on the borrower against
classified loans noted in their memorandum accounts shall be considered as
waivers.
It must be noted here that any accounting treatment required in the following
scenarios cannot be deemed to fall and must not be reported under the
aforementioned categories of financial remissions / relief:
(a) Accounting treatment required for the purpose of correcting earlier erroneously
recorded receivable entries against the borrower.
(b) Accounting treatment for already booked receivables (i.e. recorded as assets of
the bank) that are later on established, through a regulatory/ legal process or
by a regulatory/ legal/ judicial authority, to be not due on or claimable from the
borrower.
(c) Accounting treatment or reversals required for subsequent recording of mark-up
in memorandum accounts in accordance with regulatory directives pertaining to
classified loan accounts.
However, to simultaneously ensure transparency and proper approvals for book

cleaning purposes, accounting treatments and amounts as regards (a) and (b)
above:
• Must be mentioned separately in the proposals in itemized manner; and
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• For the sole purpose of determining the approval levels on the remission
approval grids (mentioned further ahead), must be aggregated with respective
remission items (if any) falling under the abovementioned remission categories;
but
• Must not be considered and reported as a remission / relief.
FCG shall be responsible for formulation and dissemination of appropriate

accounting treatment / entries / procedures in accordance with the above.
4.4.2 Process for Settlement/ Writing-off the Debt
A write-off is necessary to remove an asset from the bank’s books which is

considered to be irrecoverable from the borrower. All proposals of Write-off shall be
prepared in accordance with the governing SBP circulars and other regulatory
guidelines as amended from time to time.
All efforts should be made to recover defaulted finance with or without the
intervention of court. In case of agreement between customer and bank for
settlement of outstanding liabilities, a settlement proposal shall be elevated on the
prescribed form (Appendix I to Chapter 4.4) to the relevant approval/ review
authority, as per the remission grid, seeking approval for the settlement. A proper
settlement agreement (comprehensively drafted by our legal counsel covering all the
terms and conditions of the settlement approval) shall be executed before
implementation of the settlement approval.
After the execution of settlement, a proposal for remission (appendix II to Chapter

4.4) shall be elevated to relevant approval/ review authority seeking approval for
necessary write-off/ waiver in terms of previously approved settlement.
In case, where there is no formal settlement done with the customer, security
should be realized and all efforts should be made for recovery. In case no further
source of recovery is available, the Proposal for Remission (Appendix II to Chapter
4.4) should be prepared seeking approval to write the debt down (by applying the
provision in place for this purpose) and/ or waiver as the case may be.
The write off proposal is processed after all possible efforts are made to either
recover or improve the loan rating including revival of accounts, without taking any
additional risk. The Senior Management will recognize the innovation and ingenuity
of Branch Managers / Credit Officers in improving the risk rating or classification
of loans /advances including restructuring of credit facilities. The restructuring
however, should clearly demonstrate improvement in bank’s position both in short
and long terms.
Where a write off has been approved and at a later stage the customer comes up for
settlement of the liabilities, a post write off settlement proposal (Appendix III to
Chapter 4.4) shall be elevated for seeking necessary approval to the level where
request for write-off and/or waiver was originally approved. This shall be capped at
the level of Write off committee.
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4.4.2.1 Full Write-Off
To write off the full amount of the customer’s borrowings, we must ensure the
following:
• All tangible security has been realized; and
• All avenues of recovery have been adequately explored and as such the full
amount of the debt is clearly irrecoverable.
4.4.2.2 Partial Write-Off
A partial write off of the customer’s borrowings will be subject to all known sources
of repayment being insufficient to:
• Pay an acceptable market rate of mark-up (or any other mark-up rate agreed
under a troubled loan restructure) on the total amount of the borrowings;
• Amortize repayment of the total borrowings over a reasonable period; and
• All liquid assets including TDRs / FCY Deposits, Government Security, Shares
certificates etc. are realized.
This would entail all avenues of recovery having been adequately explored and an
assessment being made that:
• Reasonable steps have been taken to realize all tangible security;
• The maximum potential recovery is clearly established by reference to current

market values; and
• The shortfall to be written off is clearly identified as being irrecoverable.
4.4.2.3 Criteria for Write-Off
Following are the points that define the criteria for write-off, any instructions
circulated by SBP with regards to write-off, from time to time, shall supersede the
following criteria.
• All efforts of assets traceability are exhausted.
• Time barred Loans / Advances etc.
• Loans and Advances with security / documentation deficiency seriously

impairing bank’s legal rights.
• Advances / Loans where both borrowers and guarantors are non-existent or

untraceable and their assets are not known.
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• Loans and advances which have become un-collectible due to part or full
erosion/ depletion of security / collateral for any reasons whatsoever.
• Loans / Advances which have been decreed but adequate assets are not
available for realization of decreed amount or part thereof.
• Loans and Advances to widows and other individuals who are destitute or
disabled and have no repayment capacity may be considered for write off on
humanitarian grounds.
• Write-off / Waiver may be allowed also to facilitate recovery of Banks stuck-up

advances.
• No discount house is available or is available but not willing to purchase the

loan.
• It is not feasible to sell the loan to discount house.
• In exceptional case(s) where bank, on commercial considerations or for the

purpose of cleaning the balance sheet, is unable to comply with one or more of
the above/SBP guidelines, may put up the case to BODs for consideration.
BODs may then decide the case on merit and by recording reasons in writing for
approval or otherwise of the case(s). These cases shall be reported immediately
to Director, Banking Inspection Department for information. All such cases
shall be reported to SAMG for onward submission to SBP.
4.4.2.4 Accountability
While considering the proposal of write off, it is to be ensured that responsibility

has been fixed and proper action taken against the officials responsible for the loss
(if the loss has been caused by negligence of any bank official) and Pre-approval
Audit of write off proposal has been carried out. MCB recognises that losses are
part of banking business but non-adherence to procedures and instructions and
concealment of facts have to be penalized.
4.4.2.5 Pre-Audit
In cases where outstanding amount of finance is equivalent or greater than PKR

0.500Million and write off of any amount is being proposed in these accounts,
remission proposal in such cases should be first pre-audited by Bank's Internal
Audit / Respective Audit Centres before consideration by approving authority.
Before elevating a pre-audit request/ processing requests for write off, following
must be ensured:
• Encashment of security held has been done or is underway at appropriate

forced sale value. Moreover, the write-off shall be made for the portion of
outstanding amount that is in excess of forced sale value.
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No write-off will be allowed where forced sale value of securities held, is more
than the recoverable outstanding amount. However, the said condition shall not
be applicable on the cases recommended/settled under any general incentive
scheme of SBP or such other committee(s) as notified by SBP or present
Committee for Revival of Sick Industrial Units (CRSIU).
• Liquid assets / readily en-cashable collateral has been fully realized and
appropriated towards adjustment of outstanding.
• Confirmation is required from originating branch/office duly countersigned by

one level higher than original approval/review level that Borrower / guarantor
has no other means of repayment. Nevertheless, a prudent banker would
certainly know the financial position and the sources of repayment available
with its borrowers".
• Borrower has not created other business interests and assets out of loan
proceeds to be written off.
• Borrower is not involved in any criminal mis-appropriation of stocks, moveable

and immoveable assets or security.
Internal Auditors shall cover the following:
• Deviation, if any from credit policy at the time of sanctioning / approval.
• Deviation from the terms & conditions of approvals of finance.
• Any concealment of facts in the Credit Proposals.
• Identification of irregularities or slackness that occurred during the

disbursement / documentation or subsequent monitoring/supervision of
loan/advance and underlying security.
• Pointing out names / designations of Officers / Staff responsible for various

lapses leading to write-off fully / partially and action taken against them along
with the reasons of these lapses. The Audit on compilation of exercise, within
five days, will return the proposal to the respective office under his signature for
final disposal.
• For writing off of loans/advances, where outstanding amount of principal is

below PKR 0.500M, the clause stipulated at para 4(vii) and (viii) of SBP BPRD
circular No.06 dated June 05, 2007 shall not be applicable. While following
clauses at 4(i) to (vi) of SBP circular in said cases shall also obtain a joint
certificate from originating branch manager and an authorized officer of the said
branch duly countersigned by the authorized official(s) of the office higher than
the originating branch confirming that no irregularity/deviation of prescribed
rules and regulations in the process of sanction, disbursement, documentation,
monitoring/supervision of loans/advances and its underlying security(ies) has
occurred which has turned the loan/advances partially or fully
bad/irrecoverable. The name(s) of the official(s) responsible for the irregularity
(ies)/lapses may be clearly spelled out along with action taken against such
official(s).
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No recommendation / suggestion vis-à-vis write-off proposal should form part of

Auditors Report. Auditors should only verify facts. However any recommendations
with regards to procedures should be part of their report. Pre-audit report should
not be older than one year at the time of elevating proposal for write-off. Relevant
approval/ review authority may call for a fresh report where it considers
appropriate.
4.4.2.6 Forced Sale Valuation
Forced Sale Valuation shall be conducted as required under governing SBP circular
and in accordance with regulatory requirements (governing PRs). GH RMG and
Relevant Business Group Head shall approve requests for conducting FSV below
the regulatory threshold.
It must be ensured that valuation report should not be more than one year old at
the time of elevating write-off proposal. Exception to this rule shall be approved by
the relevant Business Group Head, subject to confirmation by the relationship,
based on physical visit, that the existing valuation of the collateral still holds good.
Valuation shall be assigned to valuer other than the one who conducted the earlier
valuation.
4.4.2.7 Prior Approval from SBP
The write-off of loans/advances in the names of Directors or their

relative/dependent/concern in which they have any interest of 5% or more and in
the name of President requires prior approval from SBP.
4.4.3 Rescheduling / Restructuring
• Rescheduling refers to the extension in the date(s) of payment of instalment(s)

due to various reasons including but not limited to late commencement of
commercial production or teething problem faced by the project during trial run.
Similarly, restructuring is an exercise to give relief to the business units facing

severe financial crisis, in the form of change in the facility structure i.e. from
interest or mark-up based to interest / mark-up free finance, conversion of part
of finance into equity of the Company etc. Similarly relief is also given in the
form of reduction in the rate of return and extension in the date of payment of
instalment. This can also entail amendment in the security structure or loan
covenants.
• Rescheduling / Restructuring is allowed to borrower if the project / concerns /

for which the finance has been borrowed is not running smoothly and is facing
problems due to various reasons, some within the control of the borrower and
others due to factors beyond the control of the borrower.
• Rescheduling / Restructuring is allowed to borrowing concern in order to

overcome the negative effect of the adverse situation faced by the project.
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However, care should be exercised while rescheduling / restructuring sick

projects where the factors responsible for making the project sick are still
continuing.
• Rescheduling / Restructuring are generally allowed on merit but sometimes it is

also allowed as per Govt. Policy. It is generally allowed to sick Industries subject
to payment of reasonable down payment of overdue amount. Reduction in down
payment is also considered on case to case basis. The term “Sick Industry” may
be applied to all projects that are facing problems in maintaining their
operations profitably in order to earn returns on their investment as well as to
repay their debt, obligations.
• The factors which may contribute to the sickness may be external; they are
those factors over which the promoters have not direct control while internal
factors may be within the control of the management to some extent e.g. the
abrupt changes in the fiscal and tariff policies of the Government, big disparity
in the import duties on imported raw materials and finished products which
may induce smuggling and make locally manufactured goods in-competitive in
the local market, are some of the factors beyond control of the management.
• When an advance is restructured following concessions / remissions can be

considered:
o Reduction in rate of mark-up.
o Capitalization of accrued interest / Liquidated damages.
o Sometimes, principal amount of loan is also written off if such

circumstances warrant, as a very special case.
o Amendment in the loan amount to the business like allowing working capital
finance.
o Change in financial covenants.
o Increase in grace period.
o Extension in maturity.
• When an advance is rescheduled almost all general conditions remain

unchanged except the repayment period which is extended for certain period.
Payment of mark-up, etc. can be deferred for a specific period.
• In most cases, rescheduling/ restructuring proposals will not be considered

unless the proposed plan results in substantive improvement in the bank’s risk.
This may be achieved through enhancement of security/ collateral/ and/ or
through injection of fresh equity or subordinated director’s loan.
• It is to be noted that rescheduling/ restructuring is not intended to defer

identification of problems and consequent misrepresentation/ misclassification
of risk i.e., while the bank may consider rescheduling or restructuring, it should
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not be implemented to allow unwarranted improvement in the classification

category of the loan.
• Before providing concessions, the following must be ascertained:
o The obligor is not misrepresenting actual facts with the purpose of securing
concessions.
o The obligor has a viable business plan for the future as demonstrated by
financial projections. Such projections should be examined to assess the
validity of assumptions and veracity of projected cash flows.
o Management, despite the initial set back has a demonstrated competence /

ability to run the business profitably in the future.
o Willingness and stability of the sponsors to participate in a rescue

programme by injecting fresh equity or subordinated director’s loan to
demonstrate commitment to the business.
o In case of a syndicated loan, other lenders must agree, in writing, to the

proposed rescheduling/ restructuring.
• The agreed repayment schedule should be based on the cash generation

capacity of the unit, sponsors ability to inject funds into the business and the
remaining economic life of the business (plant and machinery in case of
manufacturing concerns).
• Where the restructuring involves a change in sponsors/ management, due care

should be exercised to ensure that the incoming management has integrity and
the capability to manage the business successfully. In such cases, however,
personal guarantees of outgoing directors should not be released until and
unless proper security for the outstanding amount of the loan (including
personal guarantees of the incoming directors) is obtained.
• Rescheduling/ restructuring in suit filed cases should be implemented through

consent decree except advised otherwise by the legal counsel.
• Governing SBP PRs and other guidelines shall be meticulously followed with
regards to restructured/rescheduled accounts.
• It is further clarified that ‘settlement(s)’, ‘restructuring / rescheduling’ and

‘remission(s)’ are not mutually exclusive terms and a combination of scenarios
pertaining to the same can occur simultaneously in any case / circumstances.
• Rescheduling / restructuring of deteriorated consumer loans shall be governed

as per relevant SBP guidelines (specifically BPRD Circular letter # 43 of 2009,
dated 31.12.2009), other regulatory guidelines and internal bank policy /
procedure guidelines issued from time to time.
With regards to consumer loans, cases for restructuring / rescheduling:

o Involving any remissions shall accordingly be approved as per the consumer
loans remission grids (a) & (b) below and relevant procedures; and
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o Not involving any remissions shall be approved as per the grid below:
Per customer (inclusive of all consumer facilities)

Total Restructured/Rescheduled Amount Approval Authority
PKR 50K or below Regional Collection Manager OR
Regional Recovery Manager
Above PKR 50K but not more than PKR 100K Unit Head Collection OR Unit Head
Recovery OR Unit Head Litigation
Above PKR 100K but not more than PKR Department Head Collections OR
500K Department Head Recovery &
Litigation
Above PKR 500K Group Head Consumer Banking
Note: Without remissions restructuring / rescheduling of consumer exposures managed by groups other
than CBG shall be approved as per their respective approval grids in accordance with the afore-referred
SBP guidelines on consumer loans restructuring / rescheduling.
4.4.4 Authority for Write-Off / Remission
• Authorities for final settlement, subject to the condition that there is no

violation of any instructions issued in this respect by SBP or any other
regulatory authority, are as follows:
Remission Level Approving Authority

Where aggregate of write-off plus Head-SAMG or Head of Business Group, as
waiver does not exceed PKR 3 million applicable, jointly with SCO-2 / SCO-3 RMG
subject to the condition that write-off
is not more than PKR 2 million
Where aggregate of write-off plus Group Head RMG & Group Head SAMG
waiver does not exceed PKR 5 million
subject to the condition that write-off
is not more than PKR 3 million
Where aggregate of write-off plus Management Credit Committee
waiver does not exceed PKR 10
million subject to the condition that
write-off is not more than PKR 5
million
All other cases Write-off Committee (cases to be forwarded
through Head SAMG) to be chaired by the
President other members to include Secretary
to the Management Credit Committee and
Group Heads Risk Management, FCG, SAMG,
Strategic Planning, WBG and CBBG*.
* GH WBG and CBBG will not have voting rights for approving any write-off /
waiver case pertaining to their respective group as member of the Write-off
Committee.
Back-ups shall be governed as per CA/RA document and to be effective only in

situations where the original approving authority is on leave or out of country.
For Consumer Loans Only

Any consumer financing case / account involving any remissions must be elevated
by the Consumer Banking Group in accordance with the following two approval
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matrices. However, these grids shall not be applicable to consumer exposures

transferred to SAMG and would instead be approved as per the above grid:
(a) Consumer proposals involving principal write-offs and/or other remissions
Where aggregate of principal write-off plus Department Head Collections/ Department
other remissions does not exceed PKR 250K Head Recovery & Litigation jointly with Head
subject to the condition that principal write- of Consumer Credit Review
off is not more than PKR 100K
Where aggregate of principal write-off plus
other remissions does not exceed PKR one Group Head Consumer Banking jointly with
million subject to the condition that principal SCO-2 or SCO 3 of RMG
write-off is not more than PKR 0.500 million
other remissions does not exceed PKR 3.000 Group Head RMG jointly with Group Head
million subject to the condition that principal SAMG
write-off is not more than PKR 2.000 million
other remissions does not exceed PKR
10.000 million subject to the condition that Management Credit Committee
principal write-off is not more than PKR
5.000 million
Write-off Committee (cases to be forwarded
through Head SAMG) to be chaired by the
President other members to include
All other cases Secretary to the Management Credit
Committee and Group Heads Risk
Management, FCG, SAMG, Strategic
Planning, WBG and CBBG*
* GH WBG and CBBG will not have voting rights for approving any write-off / waiver case
pertaining to their respective group as member of the Write-off Committee.
Cases involving income write-offs of less than PKR 100K (but not any principal
write-off) shall be approved as per Grid (b) below.
(b) Consumer proposals involving only remissions other than principal write-offs
25% of maximum remission amount
Regional Collections Manager or
provided that income write-offs are less than
Regional Recovery Manager
PKR 10K
50% of maximum remission amount Unit Head Collections or
provided that income write-offs are less than Unit Head Recovery or
PKR 25K Unit Head Litigation
75% of maximum remission amount Department Head Collections or
provided that income write-offs are less than Department Head Recovery &
PKR 50K Litigation
100% of maximum remission amount
provided that income write-offs are less than Group Head Consumer Banking
PKR 100K
Note:
• Joint sign-offs / four-eye principle shall not be applicable to this grid.
• Remission approvals involving income write-offs equal to or above PKR 100K (but
not any principal write-offs) shall be given as per approval grid (a) above and,
thus, would also require joint sign-offs under the four-eye principle.
For both Grids (a) & (b) above, Group Head of CBG and SAMG shall respectively
nominate back-ups for all CBG and SAMG approving authorities, backup of Head
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of Consumer Credit Review shall be Group Head RMG, while back-ups pertaining
to all other authorities shall be governed as per the CA/RA document. However,
invariably, back-ups shall be effective only in situations where the original
approving authority is on leave or out of country.
All consumer cases involving any principal write-off must carry prior
recommendation by Group Head Consumer Banking. However, GH-CBG
recommendation shall not be required for those cases / exposures which have
already been transferred to SAMG.
For all written-off cases, request for full and final settlement shall be approved at
the level where request for write-off and/or waiver was originally approved. This
shall be capped at the level of Write off committee.
All cases that require approval from Write-off Committee (WOC) shall be processed
by the relevant Credit Review Division. After obtaining recommendations from
MCC, the case shall be forwarded to Group Head SAMG (secretary WOC) for
arranging approval from Write-off Committee.
All cases that require approval from Board of Directors (BoD), shall be processed by
the relevant Credit Review Division. After obtaining recommendations from MCC,
the case shall be forwarded to Group Head SAMG (secretary WOC) for obtaining
recommendations of Write-off Committee since as per approved TORs, the WOC
shall act as recommending authority for write-off/ waiver proposals requiring BoD
approval. After obtaining recommendations from WOC, case shall be returned to
RMG for arranging approval from BoD.
Post settlement proposals shall be elevated (to relevant credit approval/review

authority) for only those cases where terms of original pre-settlement approval are
not fully complied (i.e. further remission in shape of write-off and/or waiver is
being sought).
All settlement cases where repayments were made strictly as per settlement
approval (where remission remained unchanged or where the amount is reduced
due to early repayment), such cases shall not require approval/review by the
relevant authority. In such cases, approval from GH-SAMG / Head of Business
Group only, with notification (i.e. settlement executed as per settlement approval or
settlement executed with reduction in waiver amount on account of early payment)
to the original approval / review authority, will suffice.
o Four eyes principle will be applicable to accounts handled by SAMG and

their proposals will be elevated to relevant authority of RMG (as mentioned
above) for further disposal.
o To comply with the requirements of State Bank of Pakistan BPRD circular

dated 05/06/2007, SAMG shall on regular basis compile the details of all
Loans / Advances written-off / waived and submit the same to BOD for their
information on quarterly basis.
o To comply with the requirements of SBP circular BPRD 06/07 dated

05/06/2007, CRRS shall on regular basis compile the full particulars of
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loans/advances written-off and report the same to Credit Information

Bureau on monthly basis.
o All accounts parked in business groups, where any remission has been
allowed by the above mentioned authorities, should be brought to the notice
of SAMG. Copies of all related proposals & approvals should be forwarded to
SAMG within 15 days of allowing such write-offs / waivers.
o As regards consumer proposals, except remissions in outstanding principal

(that exclusively require the creation of a write-off expense), all other items
pertaining to remissions, irrecoverable consumer loan accounts and their
management, including but not necessarily restricted to the following items,
are to be treated as either write-offs, reversals or waivers in light of the
aforementioned definitions:
• Current month mark-up
• Overdue mark-up
• Shadow mark-up
• Late fees / liquidated damages
• Cheque returned charges
• Repossession charges
• Vehicle evaluation / parking / litigation charges
• Pre-payment penalty
o As regards consumer proposals, while elevating such cases to the relevant

remission approving authority CBG must separately mention each item of
the respective write-off, waiver and reversal amounts, as applicable.
Moreover, CBG should seek FCG’s feedback, on a case-by-case basis if
necessary, to ensure proper categorization and treatment of each remission
item.
o An appropriate consumer product-wise remission approval MIS, showing

relevant remission item break-ups against each remission approval / review
authority, must be maintained and reported to CRMD (RMG), SAMG and
FCG on a monthly basis, and to the BoD through the Write off Committee on
a quarterly basis.
4.4.5 Security Redemption
All cases involving write-off, waiver, rescheduling and/or restructuring should

specifically address the issue of security redemption after adjustment of finance.
Specific approval for security redemption shall be sought in the proposal and
adequately covered in the approval. Upon full and final adjustment of finance in
such cases, Internal Audit’s clearance for security redemption should be obtained
and forwarded to the relevant Business Group Head / Group Head SAMG for final
approval for security redemption.
In cases where partial redemption of security is involved, the request for partial
release shall be forwarded by the Business Group/ SAMG to the relevant Approval/
Review Authority. The detailed mechanism for release of partial security shall be
mentioned in the proposal and shall be approved by relevant approval/review
authority on a case to case basis. The relevant approval/review authority shall
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approve the process of release and the pre-audit requirement at various stages in
the approval document on case to case basis.
Before approving all requests for security redemption, the relevant business Group
Head / SAMG - Group Head shall ensure that the security being redeemed is not
held as a common security for any other unadjusted credit facilities of the Bank
and that the Bank has not issued any letter for joint charge or received any such
letter from any other bank.
Consumer Auto Financing and Consumer Auto Leasing shall be exempted from
internal audit clearance requirement.
4.4.6 Abandonment of Collection and Recovery Efforts
When all recovery possibilities have been exhausted (asset tracing, litigation etc.), a
decision may be made to abandon further collection and recovery efforts. A
Proposal should be prepared and approved to document such decisions. Normally
such decisions will only be taken at least one year after the account has been
written down.
Approval for abandonment of collection and recovery shall be obtained from the
relevant Business Group Head/ Group Head SAMG (as the case may be). However,
where the write off approvals specifically stipulate continuation of recovery efforts,
approval for abandonment must be obtained from original approval / review
authority.
4.4.7 Data-base of Defaulters / Defaulters List
Apart from monthly / quarterly reporting by SAMG & businesses to CRRS, SAMG &
Business Groups should report the lists of defaulted customers where exposure
has been written off/ waived. This data base should be part of CRMIS and before
extending any fresh facility it should be checked whether the client has previously
defaulted with MCB or not. It is to be ensured that as soon as the loan is written-
off/ waived, all the related data of the customer is forwarded to CRRS for uploading
in CRMIS.
4.4.8 Financing to Defaulters
Specific approval from Group Head Risk Management / President shall be required
prior to allowing any fresh credit facility to a borrower or its associates, directors
and partners whose debts have been written-off in past at MCB or with other banks
/ financial institutions.
For consumer mortgages, the above shall also be applicable in addition to their
respective Product Program Manual (PPM) guidelines. Other consumer lending
products shall be exempted from the above.
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4.4.9 Lessons Learnt
The management of problem loans (NPLs) is a dynamic process. To ensure this, a

process should be established to share the lessons learnt from the experience of
credit losses in order to update the lending guidelines, procedures & manuals etc.
To accomplish this SAMG would review their cases being transferred to SAMG
(settled or in SAMG for more than five years) and would prepare a case study
(sample format of Appendix IV to Chapter 4.4) and submit the same to Credit
Review on half yearly basis.
This report should preferably be prepared and submitted to Credit Risk Review
within 30 days following half year. However this tenor should not, in any case,
exceed 90 days. From SAMG preparation of this report is the responsibility of the
Relationship Manager while from RMG this report can be finalized by SCO-1.
Format of Appendix IV to Chapter 4.4 is just a guideline but any format used
should be able to comprehend the reasons for default and highlight improvement(s)
in the existing processes.
These reports should be available for perusal to all pertinent staff members for
their reference and learning.
4.4.10 Reporting
CRRS shall report Full particulars of all loans/ advances written off to Credit
Information Bureau of SBP. RMG shall also submit to BoD, a report on quarterly
basis, with necessary details in respect of write off of loans at various levels, for
information.
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4.5 Special Assets Management

4.5.1 Introduction
4.5.2 Retain / Transfer Policy
4.5.3 Account Transfer Procedures
4.5.4 Attachments for Transferring the Account
4.5.5 Management of SAMG Accounts
4.5.6 Review of Classified Portfolio Parked at

SAMG
4.5.7 Review of Classified Portfolio Parked at

Branches
4.5.8 Guidelines for Customer Handling /

Remedial Action
4.5.8.1 Guidelines for Recovery Procedure
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4.5.1 Introduction
Special Assets Management Group (SAMG) is a separate Group that looks after
non-performing loans that require adept, dedicated and specialized recovery skills.
This Group is staffed with experienced credit officers who possess the skill-set
required for managing problem loans.
This section discusses the policy to retain or transfer the asset to SAMG, key roles
of SAMG and other stake holders, various levels of waivers/ write-off and reporting
/ review requirements.
The main responsibility of SAMG is to manage accounts classified as loss above

threshold limit of PKR 2 Mln. However, exceptions to this rule are allowed in
circumstances where Business / RMG may recommend implementation of exit
strategy through SAMG for accounts classified as Watchlist / Substandard /
Doubtful.
SAMG’s significant functions include the following:
• Ensure availability of data / information/ documentation pertaining to SAMG

Customers before completion of transfer
• Determine Account Action Plan/Recovery Strategy
• Pursue all options to maximize recovery, including placing customers into

receivership or liquidation as appropriate.
• Negotiate with client for Recovery. Where necessary Restructuring /

Rescheduling/ write-off / Waiver may be recommended.
• Regular review of transferred accounts.
• Arrange Asset Tracing
• Liquidation of cash collateral
• File recovery suit.
• File liquidation petition and liquidation of collateral.
• File for appointment of Administrator.
• Ensure adequate and timely loan loss provisions are made based on actual and
expected losses.
• Refer cases to SECP for blacklisting of Directors.
• Refer cases to District Administration for recovery under Banking Companies

Ordinance, as arrears of Land Revenue.
• Any other function as delegated by competent authorities.
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SAMG would be assisted by a panel of Bank’s approved lawyers, particularly with

regards to cases involving legal complications, filing of recovery suits, etc.
4.5.2 Retain / Transfer Policy
Whether the account will be transferred to SAMG or will remain parked at the
business group would depend on the following factors:
• All relationships with exposure (principal) PKR 2 Million & above and classified
as “Loss” will be retained by the respective Business Group for one year from
the date of classification in loss category. The relevant Business Group will
continue the recovery efforts for one year in these accounts. After lapse of one
year, such cases shall mandatorily be transferred by the Business Groups to
SAMG. Exception to this transfer policy may be allowed by the President on a
case to case basis. Any account that meets the criteria should be transferred
immediately to SAMG after completion of one year from the date account
classified as loss. The relevant Branch / Business Unit shall be responsible to
initiate the transfer process of accounts that meet the eligibility criteria.
Relevant Branch / Business Unit shall prepare the request for transfer and
obtain approval from respective Business Group Head. Relevant Branch /
Business Unit shall be responsible to provide all documents that are required to
complete the transfer process. Business units must ensure that all the transfer
formalities must be completed within 90 days after completion of one year from
the date account classified as loss.
• When any business group transfers any exposure, all other exposure (funded
and/or non-funded) on the said borrower (regular or otherwise) must also be
transferred to SAMG. If such borrowers are also availing facility at branch(es)
under other business group, the transfer shall be done under intimation to
other branch(es)/ Business Groups so that entire exposure on a borrower is
transferred to SAMG simultaneously.
• In case the exposure being transferred belongs to a Group then total Group
exposure shall also be reviewed and transferred to SAMG to ensure a unified
approach towards the relationship.
In case of groups which are partially under the control of SAMG and partially
within the other Business Groups of the Bank, the following rules shall apply:
o When 50% or more of gross outstanding to a group are classified as loss

then the entire outstanding of the group should be managed at SAMG and
similarly all review authorities of SAMG will be applicable to the group.
o Where less than 50% of gross outstanding to a group are classified as Loss
then the accounts not classified as loss can be managed by business.
However concurrence of Group Head Risk Management / President shall be
required for accounts managed by business groups.
• It is expected that the accounts that will be transferred to SAMG have already
been reported/ classified as Watchlist; however if the client has not been
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classified as Watchlist then the transfer application must accompany a

justification for not classifying and reporting the account to pertinent WAR
committee.
• All classified accounts except those falling “within parameters mentioned above”
should be handled by the respective business groups irrespective of the
classification status.
• Subjective decisions, including cases where manufacturing facility / main

business operations of the borrower are no longer in operation even though
repayment timelines are being met by the borrower, in such cases transfer of
account to SAMG shall also become mandatory. For all such cases joint
approval from Relevant Business Group Head and GH RMG shall be required.
GH RMG is authorized to take a decision for transfer of an account to SAMG on
subjective basis.
4.5.3 Account Transfer Procedures
As soon as account is classified as LOSS (which meets the eligibility criteria) a

Request for Transfer (RFT, Appendix-I to Chapter 4.5) should be completed by the
relevant Branch / Business Unit and necessary approval from relevant Business
Group Head should be obtained. The Transfer Checklist (Appendix-II to Chapter
4.5) should be completed by the Business Unit forwarded to SAMG after obtaining
approval for transfer. A copy of the same should also be endorsed to CRC. Relevant
Business Unit / Branch shall be responsible to complete all formalities for transfer
of account to SAMG. Exposure shall be transferred to SAMG after completion of all
formalities. After completion of transfer process, the account should be assigned to
Relationship Manager within SAMG, who should review all documentation, meet
the customer, and prepare a Classified Loan Review Report (CLR, Appendix-III to
Chapter 4.5) within thirty (30) days of the transfer. The CLR should be approved by
the Head of SAMG. The approved CLR shall be shared with the Head of the relevant
Business Group and the Branch/office where the loan was originally parked. This
initial CLR should highlight any documentation issues, loan structuring
weaknesses and proposed workout strategy.
Relationship Manager should ensure that the following is carried out when an
account is transferred to SAMG:
• Facilities are withdrawn or repayment is demanded as appropriate. Any draw-

downs or advances should be restricted. Any draw-downs should only be
allowed after careful scrutiny and approval from competent authorities.
• eCIB / other reporting should be updated according to guidelines.
• Loan loss provisions are adequate keeping in view Force Sale Value (FSV) of
collateral.
• Loans are only rescheduled / restructured in conjunction with Bank’s policy.

Any rescheduling should be based on projected future cash flows, and should
be strictly monitored.
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• Prompt legal action is taken where required.
4.5.4 Attachments for Transferring the Account
Branches shall ensure forwarding of following documents along-with Handover

Checklist, while transferring account / limit from one Branch to SAMG Units after
obtaining necessary approval from relevant Business Group Head. It must be
ensured that all appendices should be counter-signed by the competent authority
not lower then General Manager for CBBG and Unit Head for Wholesale Banking
and Islamic Banking.
• CRMIS “Set-up Sheet”, available at Branches where CRMIS is installed or from

Regional / Circle Office. This shall facilitate the transferee Branch in entering
the details in CRMIS System.
• For Basel Compliance it is mandatory that we have pertinent information of the

defaulted clients therefore it will be mandatory for Business Unit to submit the
requisite information to SAMG, as a minimum, for the last three years as per
the format prescribed by RMG from time to time.
• It is to be noted that original security documents should remain in custody of

the branch / CRC (which ever applicable) and should be forwarded to SAMG
only when required in writing. However the transfer of original charge forms/
security documents should be routed through circle / controlling office after
obtaining approval from GM / Corporate Head.
• Details (as per Appendix-II to Chapter 4.5) to be provided and also adhere to the
following:
o The covering letter should mention the accrued mark-up / memorandum

entry figure along-with rate of mark-up and period etc.
o Also mention, if there is any amount lying in suspense / sundry account

and the same should also be transferred separately.
o The original files should be transferred and copy / shadow files be retained
at the branches. Copy(ies) of any communication between SAMG and the
customer, after transfer of files shall be endorsed to Branch for their files.
Where necessary the same should also be endorsed to their controlling
Offices.
o Copies of all proposals, approvals, charge documents and securities held

should also be forwarded along-with the correspondence file.
o The originating branches will remain responsible for these accounts in terms
of providing statements of account / information required if deemed
necessary by SAMG, bearing all litigation expenses (including legal,
professional, consultancy fee / other charges if any claimed by the Advocates
/ Court), whenever it is so required. All expenses related to accounts
transferred to SAMG (legal, professional, consultancy, insurance, muccadum
charges, etc. etc.) shall be borne by the respective Business Unit / Branch.
Relevant Unit at SAMG before incurring such expenses shall obtain
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necessary approval from competent authority within SAMG and then incur
the expenses accordingly. SAMG shall forward necessary details to relevant
branch/ business group. SAMG and relevant branch/ business group shall
maintain proper record of all such expenses account wise.
o Mark-up should be charged strictly in accordance with the circulars issued

from time to time. As per SBP PRs, as soon as account is classified no mark-
up is to be charged.
o Group summary sheet (Please refer the Chapter on Credit Approvals).
Transfer of credit exposure of any borrower after 25th of any month and on Fridays
/ Saturdays to be avoided, so that credit exposure does not remain un-responded
in monthly / weekly Statement.
4.5.5 Management of SAMG Accounts
Operation and day to day activities in accounts transferred to SAMG shall be

managed by SAMG, but, where circumstances so warrant, accounts may be
managed on a day-to-day basis by Business Groups (subject to concurrence of
Group Head Risk Management / President).
All accounts transferred to SAMG will be assigned to a specific Relationship

Manager who is ultimately responsible and accountable for coordinating and
controlling the management of the Special Asset to ensure that:
• Credit and other risks are properly identified, analysed and assessed;
• Account objectives are agreed and approved; and
• Strategies and action plans are formulated, approved and implemented so as to

minimize risks, prevent losses, maximize recoveries and restore profits through
rehabilitation, restructuring, work-out and direct recovery and / or legal
actions.
SAMG Relationship Managers are required to manage all manner of transactions

associated with the normal operation of the accounts under their charge, including,
but not limited to, advances, extensions, renewals and modifications of loan terms
and conditions; these are tasks which fall within the range of duties typically
carried out by a Relationship Manager in the Business Groups. Additionally SAMG
Relationship Manager has to carry out a wide range of specialized tasks, including
the following:
• Recommendation of provision against or write-down of a Special Asset’s value in

the Bank’s books.
• Recommending debt compromise or forgiveness, to include principal, mark-up,

mark-up adjustments and any other fees or amounts due to the Bank.
• Release or disposal of security /collateral after approval from competent

authorities.
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• Commencement of foreclosure proceedings, litigation, legal settlements, lien

settlements etc.
• Management of property / asset acquired as a result of foreclosure etc. Where

the Bank acquires ownership of real estate / tangible asset in this way, the
concerned SAMG Relationship Manager shall be responsible for the close
monitoring of expenditure, continual review of compliance with pertinent laws
in the relevant jurisdiction and ensuring that appropriate insurance cover is
always in place.
• Sale of assets for cash or through providing new loan facilities.
• Recommending asset swaps under compromise agreement to Competent

Authorities.
• Engagement of consultants, legal counsel, contractors, advisors etc.
• Conversion of debt to equity.
• Leading, arranging and / or agreeing to participate in the formation of any

creditors’ group (in instances like where banks go for combined settlement /
litigation against a customer).
Whilst some assistance from Business Groups may be sought, it is essential that
the autonomy of SAMG and its Relationship Manager be maintained to ensure that
appropriate recovery strategies are implemented.
4.5.6 Review of Classified Portfolio Parked at SAMG
Review of all accounts parked at SAMG shall be conducted as per the below grid on
annual basis, an NPL Review Proposal (Appendix IV to Chapter 4.5) should be
prepared by the SAMG Account Relationship Manager to update the status of the
action / recovery plan, review and assess the adequacy of provisions, review of
security adequacy, and modify the bank’s strategy as appropriate. Classified Loan
Review shall be approved/reviewed as per the following grid and a copy of the
approved SAMG Review Proposal shall be sent to the transferring business unit.
Exposure Level Reviewing Authority

Where exposure is PKR 25M or below Review level shall be determined by
Head SAMG within SAMG*.
Where exposure is above PKR 25M but not Head-SAMG & SCO-2 RMG
more than PKR 50M
Where exposure is above PKR 50M but not President & Head-RMG
more than PKR 100M
Where exposure is above PKR 100M MCC
* Such approval levels shall be intimated to Group Head RMG for their information and
concurrence.
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All proposals involving any remission (writer-off and/or waiver etc.) shall be
processed on the Remission Proposal (Appendix I to Chapter 4.4) and shall be
approved/reviewed as per Authority for Write-off / Remission grid.
4.5.7 Review of classified portfolio Parked at Branches
Regardless of the approval level and exposure amount, all reviews of regulatory
classified loans will be done at one level higher than the original approval / review
level. This review will be done on the format of Standard Credit Appraisal form as
per section 3.3.4 (for loans classified as substandard and doubtful only) with
special mention of status of the recovery plan, action taken, review of security,
adequacy of provisions, and proposed bank’s strategy. For review of Loss category
loans, NPL Review Proposal (Appendix IV to Chapter 4.5) shall be used. Frequency
of such review shall be annual or more frequent if specified / desired by the
relevant Reviewing Authority. Relevant Business Unit / Branch shall be responsible
for elevating the Proposal to the concerned approval/review authority. All proposals
involving any remission (writer-off and/or waiver etc.) shall be processed on the
Remission Proposal (Appendix I – to Chapter 4.4) and shall be approved/reviewed
as per Authority for Write-off / Remission grid.
4.5.8 Guidelines for Customer Handling / Remedial Action
• All efforts for recovery of Bank's dues should be initiated at the earliest.
• Unit Head, Regional and General Managers' (Higher level Field Managers)
concerted efforts to persuade the customers to submit, in writing, a definite
repayment schedule, if Branch / Relationship Manager's (lower level Field
Managers) endeavours, in this direction, have not produced the desired results.
• Co-ordination of efforts at the Senior Executives / SAMG / Principal Office level

to assist in pressurizing the defaulters for early repayment, in accordance with
Bank's standard procedures.
• In genuine cases, where financial losses have been suffered by the customers
due to factors beyond their control and customer repayment capacity is very
limited, the Bank may allow repayment on easy terms, through moratorium /
rescheduling. Also, in such instances, financial relief may be allowed through
remission / write-off / stoppage of mark-up or through concessional rate of
mark-up, following the procedures laid down for doing so, particularly State
Bank of Pakistan's directives / Prudential Regulations / Bank’s internal policy,
as may be applicable and adhered to.
• If there is insufficient tangible response from the defaulting borrowers, the

usual remedial action necessary in such cases should be initiated viz. issuance
of legal notices through the lawyers and, thereafter, proceeding further through
the appropriate legal courts, for recovery. Finally, the liquidation process may
be initiated, declaring the borrower as bankrupt, for realization of proceeds of
borrowers' assets, to be applied towards settlement of Bank's dues.
• The defaulters should be declared as Bad / Defaulting Borrowers, by putting

them on the ‘Defaulters list’, to safeguard against any financing in future.
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• Every effort should also be made by the concerned SAMG Office, through Bank's
solicitors, for prompt disposal of legal cases in the courts.
• Accurate reporting of NPLs in CRMIS.
4.5.9 Guidelines for Recovery Procedure
The procedure for recovery of bad / stuck - up advances, either under the previous
interest - based system or under the present PLS based system is basically the
same, except for certain variations in the legal modalities involved, as outlined
hereunder:
• Recovery suits for interest - based finances / on amount Non-interest Banking

System, are to be filed in the Banking Court / High Court depending on amount
as per Financial Institution (recovery of Finances ) Ordinance 2001.
• In case of interest - based loans/advances, the accrued interest is recoverable

from the defaulting borrowers for the entire period during which the dues have
remained outstanding and Court allows decree, along-with Interest till the date
of realization.
Under the Non-interest based System, however, the Court grants decree,
allowing mark-up for the limit period and it depends upon the Court's
discretion, as to whether or not, cost of funds, if any, are allowed.
• Owing to the afore-mentioned difference in legal concept, while suit for recovery
under the old interest based system could be filed at any time within the
limitation period, under the prevailing Non-interest based System, it is in the
Bank's interests to file a recovery suit as soon as possible, as delay in filing a
recovery suit would cause loss to the Bank.
• It is of utmost importance that our Branches realize the difference between the
two systems, explained in the preceding three paragraphs. They should not
continue applying / charging mark-up on credit facilities allowed under the
present non-interest based System in the same manner as applicable to loans
under the old interest based system.
The requirements under Prudential Regulations are to be adhered to.
• As indicated in the preceding sections (Remedial Actions and Customer

Handling / Remedial Tips), there are various options available to the Bank for
recovery of its stuck-up credit portfolio and it is for the Bank to select the most
viable method of settlement in the best interests of the Bank.
• In case Branches require any further clarification, the matter should be referred
by them to our Special Assets Management Group or Legal Affairs Division, for
necessary guidance and assistance.
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4.6 Monitoring
4.6.1 Introduction
4.6.2 Management Information System
4.6.3 Exception Reporting
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4.6.1 Introduction
One of the main reasons for loans going bad is the lack of proper monitoring and
supervision. Accordingly, effective monitoring of regular loans should be ensured.
To minimize credit losses, monitoring procedures and systems should be in place
that provides an early indication of the deteriorating financial health / inability /
unwillingness of a borrower regarding repayment of loan.
The risks in a relationship can arise both from factors that are internal or external
to the client. A borrower with good financials & management can go bad despite
Relationship Manager taking all the standard precautionary measures. This could
be due to some unforeseen events or unpredictable external factors e.g. sudden
adverse changes in the local / international economic scenario. Unexpected
changes in Government policies, local / global market trends, etc. could result in
financial losses to customers' business which, in turn, would jeopardize Bank's
position with regard to security / recovery of finances.
4.6.2 Management Information System
The risks involved may be overcome / minimized by vigilant monitoring, early

identification of potential bad debts and prompt remedial measures to safeguard
Bank's interests. At a minimum, systems should be in place to report the following
exceptions to relevant executives in RMG and Business units:
• Past due (including overdue but not classified, Watchlist Accounts & Regulatory
Classified) principal or interest / mark-up payments covering trade bills etc.
• Account excesses.
• Expired Guarantees.
• Breach of loan covenants like non adherence to loan terms and conditions,
delayed or non-receipt of financial statements and any other covenant breaches
or exceptions are referred to RMG and Business units for timely follow-up.
• Documentation & reporting of any internal, external or regulator inspection/
audit/ CRC/ RAR observation / finding for timely corrective action and
reporting of the same to relevant approving authority.
• Delayed or non-review of a facility16.
MIS systems must be able to produce the above information for on-site and off-site
review. Where automated systems are not available, a manual process should have
the capability to produce accurate exception reports. Exceptions should be followed
up and corrective action should be taken in a timely manner before further
deterioration.
Branches are required to send sanction advice to the borrower for acknowledgment
of acceptance of approved terms and conditions. It is advised that for all new
facilities (including one-offs) / renewals a sanction advice should be sent to the
customer giving details of the transaction, security, purpose, mark-up rate and
expiry dates etc. All Branch Managers/Relationship Managers are required to send
a reminder letter in case customer fails to make payment of Principal and/or mark-
up on due date. The reminder letter should be sent to customer not later than 5
16 All borrowing relationships / loan facilities should be reviewed and approved at-least annually (including long
term facilities, which should be reviewed at-least annually)
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working days from due date. This letter (Appendix-I to Chapter 4.6) is in addition to
the documentary requirements detailed in the chapter covering security
documentation.
Branch Managers/Relationship Managers should make continuous efforts for

recovery of overdue principal/mark-up and repeated reminders should be sent
fortnightly.
In case customer fails to make payment of overdue liabilities within 60 days from
due date. An intimation should be sent informing customer about the implications
of reporting of name to eCIB (copy of format attached as Appendix-II to Chapter
4.6). It should be ensured that this intimation letter is sent to the customer after
lapse of 60 days from due date of Principal and /or mark-up.
4.6.3 Exception Reporting
One of the key controls for credit monitoring is highlighting and reporting existing
or expected irregularities from standard practice to the management. Complete and
correct reporting of CIF/ CRMIS data shall be of great assistance in this respect.
SN Statement Name Recipient Originator Frequency Append Description

ix
1 Statement of Past Region / Branch / Monthly III-i This statement
Due Obligations Circle/ CRCD Area Office should incorporate
all past due (except
Regulatory
Classified) principal
or interest / mark-
up payments
covering trade bills
too
2 Account Excess Regional / Branch Weekly III-ii Should incorporate
(Commitment / General all the excesses
Outstanding Manager / allowed in the
Monitoring CRCD particular week
Report)
3 Statement Of Regional / Branch Monthly III-iii Should incorporate
Expired General all the expired
Guarantees Manager guarantees
outstanding
4 Statement Of Region / Circle Branch / Monthly III-iv Should incorporate
Expired Letter Of Area Office all the expired LCs
Credits outstanding
5 Statement of Region / Branch / Monthly III-v Should incorporate
Expired Facilities Circle/ CRCD Area Office all the clients
regardless of the
outstanding
6 Statement of Region / Branch* Monthly III-vi Any loan covenant
Breach of Loan Circle/ Credit required to be
Covenants Review -RMG complied along with
any unauthorized
beach of manual
should be covered
In addition to the above mentioned statements, CRCD shall continue to prepare Unit Exception
Report (UER) and same should be advised to the branches/ Business Units periodically.
___________________________________________________________________________
205
Credit Handbook
Section 4
Appendices
___________________________________________________________________________
206
WATCHLIST REPORT*
Report Date:
Date of original WL:
Date(s) of last WL: Prepared by:
Business Group / Circle: Branch Code:
Customer Name: Relationship Manager:

Group: Approving Authority:
Nature of Business:
Date of Latest Customer visit:
CRR Grade (at last approved): Date: Facility Review Date:

CRR Grade (current): Strategy: Hold/Reduce/Restructure/Exit
Reaffirmed CRR Grade: (Now)
Fund Based Non Fund Based Total

Facilities & Facility Over- Facility Over- Facility & Over- Date
Outstanding & O/S due & O/S due Amount O/S due Since
Amount & IDA Amount & IDA & IDA Overdue
Customer
Group
Security
i - Brief description of security (including FSV, name of the valuer and date when the valuation was carried out)
ii - Is Security and Documentation complete? : Yes/No
(If No, then please provide brief details of deficiencies. Also include action plans and deadlines to perfect security and
documentation in “Key Strategy/Action Plan” section)
iii - Security Checked by LAD/ Approved Legal counsel/ CRC/ Audit? : Yes/No
iv - Date Checked:
v - Is insurance cover available: Yes/No
(Brief details of insurer, insurance amount, premium payment receipts etc.)
Reasons for being classified Watchlist:
Key Strategy / Action Plan (bullet points):
Declassification Triggers** (bullet points):
* To be initialized five to fifteen business days after Watchlist symptoms begin to surface. After approval of initial
classification, report to be prepared on quarterly basis and updated more frequently in case of need to reflect
changes in circumstances until account is taken out of Watchlist category. Copy of this report is to be held at the
branch and the Head Office.
** Events to be specified in bullet points, the occurrence of which will trigger declassification of account from
Watchlist to Regular Category.
___________________________________________________________________________
207
Business Group / Circle:
Strategy Agreement / Documentation:
1- Have strategies and action plans been agreed with the customer? Yes/No
2- Are strategies and action plans documented with the customer? Yes/No
3- Has the customer breached any condition since strategy /action plans were agreed? Yes/No
In case of ‘No’ answer to 1 and / or 2 above; please indicate the expected date of completion / compliance, In case of
“No” to 3, please document reason for breach of previous strategy / action plan:
DD/MM/YYYY (Agreement)
DD/MM/YYYY (Documentation)
Progress Since Last Report:
Prognosis: Overall condition of the client is considered to be: Improving Stable Deteriorating
Relationship / Branch Manager Comment: Unit/ Regional Manager /GM Comment:
Business Head/ Corporate Head Comment: Group Head Comment:
WAR Level 1: Relevant CO/ SCO Comment:

WAR Level 2 / 3: Relevant SCO’s Comments:
AR Level 4: Group Head RMG Comments
___________________________________________________________________________
208
WATCHLIST SUMMARY REPORT AS ON __________
A- Watchlist Cases
Customer Business Group Date placed on Exposure in O/s Collateral Valuation Ageing of Strategy last Recommendations of Current
WL status PKR Millions Valuation Date Overdues agreed with the last WAR Strategy
(FSV) the customer Committee Status
B- No of cases declassified from Watchlist during the month __________
[Watchlist Declassification Report is also attached]
C- Details of cases shifted from Watchlist category to PR classification during the month
SN Name of Customer Date placed on WL Total Exposure in PKR Millions Exposure Classified in PKR Millions
____________________________________________________________________________________________________________________
209
WATCHLIST DECLASSIFICATION REPORT *
Report Date:
Date of original WL:
Date(s) of last WL: Prepared by:
Business Group: Branch Code:
Customer Name: Relationship Manager:

Group: Approving Authority:
Nature of Business:
CRR Grade (at last approved): Facility Review Date:

Date:
CRR Grade (current): Strategy: Hold/Reduce/Restructure/Exit
Reaffirmed CRR Grade: (NOW)
Reasons for being classified Watchlist:
Reasons for Declassification:
Business Head/ Corporate Head Relationship / Branch Manager

Comments: Comments:
SCO Comment: Credit Executive Comments:

(where appropriate)
Signature of original approving Signature of approving authority

authority next on the approving grid
* Once the reasons for classification are no longer valid, a declassification request may be initiated and approvals
sought at one level higher than the initial sanctioning authority
___________________________________________________________________________
210
SETTLEMENT PROPOSAL
(Rs. in Million)
1. Approval Level:
2. Title of Account:
3. Nature of Business:
4. Date Account Transferred to SAMG:
5. Business Name from where A/C transferred:
6. Branch Name with Code:
7. Amount outstanding (as on…..) (Outstanding exposure details to be on obligor

group basis, where applicable)
(i) Funded:
(i) Principal
(ii) Markup@ SMR (from…. to)
(iii) Other/Legal Expenses
(ii) Non Funded Rs.__________

Please provide details of O/S non funded exposure along with margin held (if any)
8(a) Amount of Provision Held:
8(b) Provision Parked At:
9. Agreed Repayment as per settlement deal with Customer:
(i) Principal
(ii) Markup
Total Agreed Repayment
10. Amount to be Write off / waived off after execution of settlement:
(i) Proposed Write off

(ii) Proposed Waiver
Total Write off / Waiver
11. Status of Security:
Sr Date of
Description of Property MV (Rs.) FSV (Rs.) Valuators
# Valuation
___________________________________________________________________________
211
12. Legal Status/Brief Background:
13. Comments / review of clients latest CIB Report:
14. Offer of Borrower:
15. Details of Previous Settlement, if any:
16. Deal Flow:
17. General Settlement Terms:
18. Rationale for settlement:
19. Pre-Audit Requirement:
20. Deviation from SBP Guidelines (if any):
____________________ _______________________
(Name) (Name)
Relationship Manager Unit Head
____________________ _______________________
(Name) (Name)
Department Head Divisional Head
____________________
(Name)
Group Head
___________________________________________________________________________
212
Br. Code A/C # Type Calendar Year CP#
Proposal of Remission (Write off/Reversal/Waiver)
Branch: Br. Code: Ref. No. Date

Region: Circle: Date of a/c opened
Business group: Date of facilities first allowed
Group: - CRR: Proprietor/Partner/Directors
Nature of % Share
business:
Capacity 1
(production):
Plant location: 2
Business address: 3
Person to contact: 4
Phone no.: Fax no.: 5
Ownership type Estab. date 6
Involvement of other banks (y/n) 7 Total . . . 100%
Remarks : Next Review Date:
1- LATEST CIB REPORT
Fund
Report dated: N.F. Based Total Overdue Default
based
i) Borrower's Account :
Total O/S in Group A/c (Incl.
ii) Above)
2- GROUP POSITION:
FUND BASED
GROUP COMPANIES BRANCH NON FUND BASED O/S OVERDUE DEFAULT
MARK UP
PRINCIPAL Accrued
Total:
3- STATUS OF THE A/C AS ON
Limit Outstanding IN PKR

Expir Other Classificati
S Initial Total Provision Present
y Principa Mark-up Mark-up Expense on
. Nature Amount Date
Date l Charged Accrued
N Dt. Status
o
Total
___________________________________________________________________________
213
4- SECURITIES HELD (LIMIT-WISE; AT THE TIME OF INITIATING THE PROPOSAL)
S. Market Present Date of

Particulars Name of the Valuator
No. Value FSV Valuation
Total:
5- BRANCH MANAGER/EXECUTIVE WHO RECOMMENDED THE CREDIT PROPOSAL
NAME DESIGNATION PLACE OF PRESENT POSTING
6- SANCTIONING AUTHORITY WHO SANCTIONED THE CREDIT PROPOSAL
NAME DESIGNATION PLACE OF PRESENT POSTING
7- DETAILS OF SUIT FILED
Execution
Date Date of
Court Name of Legal Counsel Amount Date/ Progress
Filed Decree
of Court Case
Current Status:
8- DETAILS OF COUNTER LITIGATION:
Date Name of Legal Date of Execution Date/

Court Amount
Filed Counsel Decree Progress of
Court Case
Current Status:
___________________________________________________________________________
214
INTERNAL AUDIT REPORT; audit date should not be older than 1 year & must encompass
9- the current status, (give name of person heading audit team, brief findings of the audit
including fixation of responsibility, if possible, for advance going bad)
10- Recovery efforts made; including rescheduling /restructuring allowed (including date of
each relief involved and reason for non-adherence)
11- Is borrower doing business in some other Name; give details:
12- Liability Position with amount upto paisas
Nature Account number Principal Mark up/Intt. Other charges Total

Outstanding Liability Before Settlement (attach settlement approval):
Total Outstanding liability

Less :Amount Recovered as per Approved Settlement
Total Amount Recovered

Net Outstanding Liability; Recommended for Remission:
A--Net Outstanding Liability

Amount Recommended for Write off
B--Total for Write off

Amount Recommended for Reversal from Mark-up Recoverable Account:
C--Total for Reversal:

Amount Recommended for Waiver:
D--Total for Waiver:

Amount Recommended for Remission(E=A=B+C+D):
E--Total for Remission:

Date mark-up stop accruing in memorandum account:
___________________________________________________________________________
215
13- Reasons/ Justifications for recommending for Remission:
Tick appropriate reason and strike through others:

The borrower has paid the agreed settlement amount of Rs. _____________, as mentioned in (12)
above towards full and final settlement. For the rest remission is to be allowed as above.
The borrower is not traceable and his whereabouts are not known nor his assets are known/ could
be traced.
The borrower has paid/deposited amount in terms of Judgement/Decree and balance is to be
written-off.
Additional reasons:
14- Further recovery efforts (Please tick the appropriate and strike through the irrelevant):
To be abandoned and all litigation to be withdrawn

To continue
15- Securities Held (Please tick the appropriate and strike through the irrelevant):
To be released (wholly or Partially

Not to be released till any settlement.
16- DESCRIPTION OF CONTROL/OPERATIONAL FAILURE RESULTING IN LOAN LOSS :
a. Attested copies of documents to be attached; if available otherwise the

fact should clearly mentioned
Approved settlement Proposal; if the remission is being recommended as an offshoot of

1
settlement:
Statements of all the accounts; principal; mark up (accrual, memorandum & recovered, mark
2
up suspense, other charges etc.
3 Photocopy of Account opening form
4 Photocopy of Plaint, if suit filed
5 Photocopy of Decree, and Judgement, if suit decreed.
6 Photocopy of execution application, if execution filed
7 Request letter of borrower for settlement
8 National Tax Number
b. More over CHEK LIST FORMAT (as per BID Circular No. 2 of 03.09.2001)
along with attested copies of all the documents ticked "Yes", must also be
submitted. It is MANDATORY)
Name; Name;
Designation Designation: Br. Manager/Unit Head
(Credit Officer/Relationship Manager)
___________________________________________________________________________
216
17- APPROVAL: (Approval Level)______________________________)

Approved for remission as under:
WRITE-OFF RS._________________________________
REVERSAL RS._________________________________
WAIVER RS._________________________________
TOTAL RS.____________________________
Further recovery efforts: to continue / to abandon

Securities: to be released (wholly or partially)/ Not to be released till settlement
Approved By:
Name; Name; Name;
Designation Designation Designation
Name; Name; Name;

Designation Designation Designation
___________________________________________________________________________
217
BORROWER NAME:_______________________________
CHECK LIST
(To be annexed with each write-off Proposal)
Please arrange to furnish attested photocopies of the documents (where applicable)

1- Is / are Borrower's Loan application(s) available on record? Yes No
If Yes, Dated
2- Is / are original sanction advice(s) available on record? Yes No
If Yes, Dated
2-A Is / are renewal sanction advice (s) available on record? Yes No
If Yes, Dated
3- Is / are there any enhancement (s) Sanction Advices in loan facility available Yes No
on record?
If Yes, Dated
3-A Is / are borrower request letter for enhancement (s) of limit available? Yes No
If Yes, Dated
4- Whether Credit Worthiness Reports on the Borrowers were obtained from Yes No
banks / other financial institutions?
If Yes, copy of receipt dated
5- Is the nature of business available on record? Yes No
6- What is the status of ownership of Business?
Sole Proprietorship / Partnership / Private Limited Co. / Public Limited Co./ Other
7- Are names and addresses of Owners/ Partners/Directors available on record? Yes No
If Yes, give details as follows:
Name of Director / Partner / Proprietor
With NIC No. (If available)
8- Are the names of Guarantors with full addresses, their status and their worth Yes No
at the time of sanction and at present available on record?
9- Is the mode of repayment of loan or repayment schedule available on record / Yes No
mentioned in Sanction Advice?
10- Is the Valuation Certificate of property / security through bank's approved Yes No
Surveyor available on record?
If Yes, Valuation Certificate dated _______________ for Rs.____________by
M/s. _____________
11- Is legal opinion of the banks Legal Advisor regarding genuineness of the Yes No
Security documents available on record?
If Yes, Opinion dated_____________
12- Is the report of the borrower's borrowings from other banks / financial Yes No
Institutions called from (CIB) Credit Information Bureau of SBP?
13- Is the date and amount of last repayment available on record? Yes No
If Yes, Date
14- Are the reasons on account of which the loan became stuck-up /Write-off
available on records?
If Yes,
a) Reasons for stuck-up
b) Reasons for Write-off
15- Are the details of outstanding against the borrower i.e. Principal, Interest Yes No
charged. Accrued Interest not debited, Penal Interest, Other Charges and total
available on record?
___________________________________________________________________________
218
16- The details of recovery efforts made by the bank Brief steps / efforts taken
Legal Notice issued Yes No
Suit No. Yes No
Suit Decreed Yes No
Execution filed Yes No
17- Are details of compromise made outside the Court and reasons there of Yes No
available on record?
If yes, copy of compromise application filed in Court.
18- Dates on which the borrower deposited amount in terms of compromise Yes No
If yes Dated
19- If the borrower has become bankrupt, are the details of Court proceedings Yes No
and action taken by the bank available on record?
20- If the borrower is dead, are the following details available on record:- Yes No
Heirs left behind? Yes No
If yes, give detail. Yes No
ii) Assets left behind? Yes No
iii) Valuation of Assets? Yes No
21- Write-off approval of the Competent Authority is attached? Yes No
22- Are the details of action taken against the delinquent officials, available on Yes No
record?
If yes, details of punishment awarded / action taken
Name
Designation
What action taken
23- a. Whether the borrower is still in business? Yes No
b. Is borrower doing business in any other name? Yes No
24- In case of sale of stock / securities / properties, whether the proceeds thereof Yes No
credited to the loan account?
If yes, Dated
25- Whether the securities pledged/hypothecated were released to the borrower? Yes No
If yes, date of release
26- Whether property / properties mortgaged were redeemed to the borrower? Yes No
If yes, Date of redemption:

Documents by which redeemed:
27- Whether periodical stock reports / Insurance cover of hypothecated / pledged
stocks were obtained?
If yes, Last stock report and last Insurance cover to be attached. Yes No
28- Whether physical verification of the hypothecation / pledged stock was Yes No
carried out periodically?
If yes, Last verification / visit report to be attached.

29- Whether debit balance confirmation was obtained from the borrower if so, is a Yes No
copy of the same available on record?
If yes, Dated
Credit Officer/Relationship Manager Br. Manager / Unit Head.
___________________________________________________________________________
219
POST WRITE- OFF SETTLEMENT PROPOSAL
(Rs. in Million)
1. Title of Account:
2. Nature of Business:
3. Date Account Transferred to SAMG:
4. Business Name from where A/C transferred:
4(a). Branch Name with Code:
5. Actual Figures:
(i). Funded
a. Principal Written-Off
b. Mark-up in Memo Waived
c. Total Amount Written Off / Waived
d. Legal Charges incurred up to date
e. Date of write off
f. Write off Approving Authority at the time of write off
(ii). Non Funded Rs._____

Please provide details of O/S non funded exposure along with margin held (if
any)
6. Write–off Rationale:
7. Agreed Repayment By the Borrower:
(i) Principal
(ii) Markup
Total Agreed Repayment
8. Status of Security:
Sr Date of
Description of Property MV (Rs.) FSV (Rs.) Valuators
# Valuation
___________________________________________________________________________
220
9. Legal Status/Brief Background:
10. Comments / review of clients latest CIB Report:
11. Offer of Borrower:
12. Details of Previous Settlement, if any:
13. Deal Flow:
14. General Settlement Terms:
16. Rationale and SAMG’s Recommendations for proposed settlement:
17. Status of Asset Tracing:
18. Authority Level:
19. Deviation from SBP Guidelines (if any):
____________________ _______________________
(Name) (Name)
Relationship Manager Unit Head
___________________________________________________________________________
221
Title Lessons Learnt – (Title should describe the event

leading to default)
Sub Chapter No. (Any serial number that SAMG may adopt)
Reference No.
Date of Issue
Amount loosed
Industry
LESSONS TO BE LEARNT
(Chapter Title)
Background
This should cover industry, business or any particular details that needs to be
mentioned for understanding the background of the transaction. This should be
sufficient to explain why bank went for the transaction (justification), highlighting
the risks & mitigants taken into consideration at the time of approval. What were
the projections and why account deviated from them? Any other pertinent thing
can be mentioned.
Credit Risk Rating Validation

This section should elaborate on the point whether the CRR template applicable to
the said customer actually indicated the default before hand or it failed to do so?
What indicators can be built in the CRR?
Security
This should highlight the security held, any periodic amendments along with
justifications. Any monitoring issues that need to be mentioned must be stated.
Company Financials
Financial position / ratios considered while financing. Any ratio that was ignored,
which would have / was indicating deterioration in the company’s profitability.
Projects along with assumptions etc.
Lessons from this experience

This should explain the aspect that we could learn from the default. What went
wrong, when and why it happened. Most importantly it should elaborate on how
losses would have been prevented/ minimized, something that was ignored etc.
Conclusion
Any suggestion regarding process improvement etc.
___________________________________________________________________________
222
Request for Transfer
To: Date:
From: Ref. No. :
Customer Name Group Name

Present CRR SBP Classification
Account Manager Date of existing
SBP Classification
Relationship / Date classified as
Branch Manager Watchlist
Unit Head / Group Exposure
General Manager (Gross)
Brief Description of Group Impaired
Business Exposure (Gross)
Related Accounts Customer Industry
Rs in Mln
Total Gross Outstanding of the Customer
Total Classified Exposure
Net Exposure After Liquid Assets
Group Gross Exposure*
*Group summary sheet to be attached (where applicable)
Attachments List any and all documents which are physically attached to the RFT and
considered necessary for making an informed decision.
If there are too many documents to list without breaching the one-page rule, refer
instead to a list of documents which can itself become an attachment to the RFT.
References List any relevant documents which will be readily available to the Approver (such
as the Watchlist correspondence, Proposal and Approval of Finance, RAR Report,
CRMIS reporting, Call Reports, any earlier RFT or other correspondence, etc.).
Background Focus on major issues regarding the account and be succinct. If additional detail
is considered necessary, information memoranda may be attached and cross-
referenced.
Negotiations Chronological details of recovery efforts made by the field and negotiations held
with the borrowers up to the date of transfer of the account incorporating details
of recovery.
Requests State succinctly the precise purpose of the request, together with a
recommendation. Again, if additional detail is needed, information memoranda may
be attached and cross-referenced.
Signed By (Unit Head/ General Manager):

Comments
Approved By (Group Head):

Comments
___________________________________________________________________________
223
Branch Name + Code Branch Ph #
TRANSFER CHECK LIST - FOR TRANSFER OF ACCOUNT TO SAMG

Name of Borrower
Name of Concerned Person/client________________________________ Cont.
#___________
Current Business Condition: _________ (Running/Closed. if closed, please
mentioned reasons)
Date Relationship started with Bank _______________ Date 1st Credit Allowed ___________
Date of Classif. as watchlist _______________
Date of first classification __________________ Date of Classification reported as
Loss _________
Date of last Agreement for Finance executed by the client _________
Expiry of Agreement: _________________
Last payment made by the Borrower: _______________ Amount Paid: _______
Amount of existing Provision _____________ FSV:______________: Benefit of FSV taken (if any)
_________
Please convey the following figures:
a. Principal outstanding: (Nature: ___)
_____
b. Payable amount of Mark-up _____
c. Mark-up Rate as per last approval of finance SMR _____, TPMR _______
d. Repayments after expiry (if any) Principal________ Mark-up_______
dated________
e. Legal Charges / any other charges recoverable from borrower:
_____
Name of Credit Manager __________________ Name of Br. Manager______-_________
S# 1). ACCOUNTS SECTION Page

#
1 (a). A/C opening form along (b). S.S card of the clients
(c). Copy of CNIC of Account Holders/Directors
2 Brief Profile of the Company (Comprehensive report on classified account)
3 Detail of Allied Accounts (if any) along with their classification status.
4 Latest eCIB acquired from through CRMIS eCIB Report.
5 (a). Manager Latest visit report of the property mortgaged with Bank.
(b). Manager name who recommended along with approving authority’s name.
6 (a). Efforts made by the branch for recovery
(b). (Minutes of last meeting with the borrower)
7 - Statement of Account ((a).Principal (showing all Fresh/Enhanced/Renewed
Disbursements., (b). Mark-up (showing all Dr./Cr. Entries, Rate of mark-up
@TMPR & SMR)
(c). Borrowers fact sheet extracted from CRMIS Database.
8 (a). Applications for finance (in chronological order) Dated.
(b). Basic Borrowers fact Sheet Dated.
(c). Credit Proposals Dated.
(d). Sanction Advices Dated.
(e). Acceptance letter Dated.
(f). Complete IB forms held against each & every approval/sanction.
Please provide year wise set of above documents including Fresh/Renewal/
Enhancements/Extension/reductions.
(g). eCIB at each approval date.
(h). Financial Statements on all approval dates, (if applicable)
___________________________________________________________________________
224
9 Information on allied / sister concern if any
10 Certified copy of Board Resolution and list of Directors
11 Last Inspection Report, (External Audit report & SBP Audit report with
compliance)
12 Out standing Position from TSC in case of Import/export financing
2). SECURITIES SECTION

1 All (Previous/Latest) Valuation report / (s). (No. of collateral ____ )
(Total FSV _______)
2 Sale Deed / s , Fard, Mutation / Intiqal and NEC
5 Memorandum & Article of Association
6 Partnership deed (if required)
7 Letter of Hypothecation
8 Charge Certificates, Form 10 from RJSC & Form 16 if charge modified
9 Latest form 29
10 Latest Search Report
11 Irrevocable General Power of Attorney (of each property) & Agreement to create
Reg. mortgage
12 Legal opinion (Pre disbursement and Post disbursement)
13 Completion Certificate of Property
14 (a). Detail of Pledged stock (if any).
(b). Latest Stock inspection report along with current value of stock.
15 Any additional Security / documents held
16 Complete details of Pledge stock if CF/FIM sanctioned.
17 Causes Leading to Classification
3). LEGAL SECTION

1 (a). Current Legal Status: (otherwise) mention ‘SUIT NOT FILED YET’
(b). Name of Lawyer and his contact numbers:
(c). Latest update position in court (obtained from Lawyer)
2 Copy of Legal notice, Plaint / PLA, Judgment and Decree and Execution petition if
any
3 Detail of Suit Amount (Principal + M/up) Complete statement required
4). SOFT / HARD COPIES

1 Review Proposal (Last)
2 CRMIS systems file for uploading data. (Please use transfer out option from Utilities
/ Account Management and provide the file on floppy or through email)
5). CERTIFICATE/APPROVAL REQUIRED

1 Request for transfer of account to SAMG on prescribed format available in Credit
Hand Book (Appendix I to Chapter 4.5) duly signed by Unit Head/General manager
and approved by Group Head.
2 Certificate for holding of Original property documents & marking of bank’s lien
with relevant authorities
3 Certificate that No other relationship of Borrower/Mortgagor has remained in the
branch.
4 Certificate that No Mark-up was taken to income account after Classification.
5 Confirmation that no allied account of Company or its Director is running in
branch.
___________________________________________________________________________
225
6). EXPENSES SECTION

1 Detail of legal fee & expenses. And/or any other expenses incurred after
Classification
7). CORRESPONDENT BETWEEN BANK & CLIENT

1 Essential correspondence between Bank & Client/ Memos, notices issued & reply
thereof
• Only Photocopies are required. Original documents will be intact in branch/CRC
custody
• All pages must be allotted page nos (e.g. E-1, E-2)
• Pages should be duly signed / stamp by authorized person.
• Separator for each section should be arranged.
Documents must be forwarded along with Box file duly separated into sections
___________________________________________________________________________
226
Classified Loan Review (CLR) Form – A/C:- M/s.________________________________
TO: Date:
From: Ref. No:
Customer Name Group Name

Present CRR SBP Classification
Date of Account Date of Facility First
Opening allowed
Account Manager Date of Existing SBP
/Branch Manager Classification
Branch from where Date Classified as
transferred to SAMG Watch List
Unit Head/ General Group Exposure
Manager (Gross)
Brief Description of Group Impaired
Business Exposure (Gross)
Related Accounts Customer Industry
Brief History of the Relationship: (state in action words)

1.
2.
3.
4.
5.
6.
Present State of Operations / Business: Operative / Partially Operative / closed since

________
Causes Leading to Classification: (any discrepancies, errors, omissions short comings state in
action words)
1.
2.
3.
4.
5.
___________________________________________________________________________
227
Present outstanding as on _____
Facility Limit Expiry date of Fund Mark-up Total Non Fund Others Grand
Nature Amount limit / Based (Mem. A/C. Based Charges* Total
Contingent till )
obligation
Total
* give details of the amounts:
Previous Outstanding when Relationship was transferred to SAMG (on )

Facility Limit Expiry date of Fund Mark-up Total Non Fund Others Grand
Nature Amount limit / Based (Mem. A/C. Based Charges* Total
contingent till )
obligation
Total
* give details of the amounts:
Details of Securities Held: (Facility-Wise)

Facility Particulars of Securities Evaluator MV FSV Date
Total: Note: Use extra sheet, if required.
Security Assessment: (any other material fact):
Existing Provision
Comments on Adequacy of Provision
Legal Status:
Action Amount Date Dealing Counsel
Suit Filed:
Decreed:
Execution Filed:
Auction Order:
Winding-Up / Liquidation:
Counter Litigation
Criminal Proceedings (FIA / NAB / Civil Court
etc.):
___________________________________________________________________________
228
Is there an agreed restructuring in place? Yes /No

If Yes Provide details:
Date of Last security and Documentation Review:________________
Confirmation that Security & Documentation have been reviewed by SAMG: Yes /No
Actions of Other Bank / Institutions (If applicable):
Latest Payment Received: Amount ____________ date:___________ Adjusted

towards_________
Ultimate Realizable Value (ULV) Calculations:
Strategy & Recovery Plan:
Forwarded by:
Approved by:
Copy to: The Group Head_______________________
___________________________________________________________________________
229
NPL Review Proposal
(Rs. In Millions)
Name of Borrower / Group:
Branch Office:
Region/ circle:
Date Transferred to SAMG (if

applicable) Recovery Since Transfer:
Sector / Nature of Business:
Operational Status:(Select one) Operational / partially operational/closed since________
Classification Date
Present Status of Classification

Particulars of Main Sponsors / Directors / Partners:
Names Designation
Outstanding Liabilities as of __________________

Mark-
Mark-
Expiry Up in Provision
Type of Facility Limit Principal Up Other Charges Total
Date Memo Held
Charged
(till____)
Total:
Details of Securities Held: (Facility-Wise)

Facility Particulars of Securities MV FSV Date Done By
Total: Note: Use extra sheet, if required.
Legal Status:
Action Amount Date Dealing Counsel
Suit Filed:
Decreed:
Execution Filed:
Auction Order:
Winding-Up / Liquidation:
Counter Litigation
Criminal Proceedings (FIA / NAB / Civil Court etc.):
___________________________________________________________________________
230
Brief History: (Use Action Words & Sentences in Bullet Form)
No. of Resch. / Restr. So

Date Last Rescheduled / Restructured: Far:
Repayment Behaviour since last R/R Package: Regular / Irregular / Default / No. & Amount of Instalments Overdue
Developments Since last report
Strategy for Resolution/ Future Action

Plan:
Relationship Manager/ Unit Head/

Credit Manager Branch Manager
___________________________________________________________________________
231
Mr./Madam/M/s.____________________
Address :___________________
Date: :___________________
Ref No. :___________________
Dear Sir,
PAYMENT OF DUE PRINCIPAL / MARK-UP
Please refer to your following mentioned financial facilities, being availed by you
from us.
The following amount(s) in this respect is/are due for payment by you.
Sr. Nature of Amount Description Initial Due since

Finance due Date
Example
1) DF#35 1.000M Principal 30//09/2006 31/12/2006
2) DF#35 0.140M Mark-up 30/09/2006 31/12/2006
3) FIM#59/03 2.000M Principal 30/09/2006 30/09/2006
Total ____________
You are therefore requested to please pay the above mentioned amounts
immediately.
Please note that if payments are made in time, you will be entitled to a prompt
payment bonus, to be calculated as per documents executed by you, including but
not limited to, Finance Agreement(s) for respective financial facilities.
Yours faithfully,
(Manager)
Phone #____________
___________________________________________________________________________
232
Mr./Madam/M/s.____________________
Address :___________________
Date: :___________________
Ref No. :___________________
Dear Sir,
REPORTING OVERDUES TO eCIB
This refers to our letter # dated regarding payment of

markup/ principal, on account of financial facilities being availed by you.
We regret to note that you have not paid the overdue amounts, as mentioned in the
above referred letter.
You are therefore, requested to make the overdue payments to clear your overdue
liabilities.
In addition, please be apprised that all Banks/ FIs are required to report the
overdue information of their customers to eCIB (Electronic Credit Information
Bureau) database of State Bank of Pakistan. Accordingly, you are conveyed that in
case of nonpayment of the overdue amount(s) by you within 15 days of this letter,
MCB will be constrained to report to eCIB database your overdue information. This
will impact, amongst other implications, your credit worthiness; and you may not
be able to avail credit facilities from any bank in future.
In case you have already made the payment please disregard this letter.
If you have any queries or would like to discuss any aspect of your account please
do not hesitate to contact us.
Yours faithfully,
(Manager)
Phone #____________
___________________________________________________________________________
233
Appendix III-i to Chapter 4.6
MCB Bank Limited
Statement of Past Due Obligations as on _______________
To: Region / Circle/ CRCD

From: Branch / Area Office
(Rupees in Millions)
Amount Overdue
Name of Nature of O/S Amount Due Since Amount Due (90 days or more)
Sr. # Remarks
Customer Finance Oldest Latest Mark- Mark
Principal Mark-Up Principal Principal
Date Date Up -Up
Signature
234
Appendix III-ii to Chapter 4.6
MCB Bank Limited
Account Excess (Commitment / Outstanding Monitoring Report)
To: Regional / General Manager / CRCD/

From: Branch
If Yes
Excess Date of
Date Customer's O/s in Excess allowed
Yes/No Remarks
Name Adjustment (if days for days
Excess
any)
Signature
235
Appendix III-iii to Chapter 4.6
MCB Bank Limited
STATEMENT OF EXPIRED GUARANTEES AS ON _______________
To: Region / Circle

From: Branch
Date
Amount of Issued on Beneficiary Expiry of Liability Status whether
of BG# Remarks
BG behalf of Name Guarantee reversed or not
Issue
Signature
236
Appendix III-iv to Chapter 4.6
MCB Bank Limited
STATEMENT OF EXPIRED LETTER OF CREDITS AS ON _______________
To: Region / Circle

From: Branch / Area Office
Date
Issued on Beneficiary Expiry Liability Status whether
of LC# Amount of LC Remarks
behalf of Name of LC reversed or not
Issue
Signature
237
Appendix III-v to Chapter 4.6
MCB Bank Limited
Statement of Expired Facilities as on ..................
To : Region / Circle/ CRCD

From : Branch / Area Office
Branch Account Nature Amount Outstanding Initial Limit Sanctioning SBP Mark-up Over Due Overdue Reason Expected
Name of of Date Expiry Authority Classification Due Amount since for delay date of
Facilities Facilities Date Code in Approval
Approval
a) a) a) a) a) a)
b) b) b) b) b) b)
c) c) c) c) c) c)
Total Total Total Total
a) a) a) a) a) a)
b) b) b) b) b) b)
c) c) c) c) c) c)
Total Total Total Total
Signature
238
Appendix III-vi to Chapter 4.6
MCB Bank Limited
Statement of Breach of Loan Covenants as on ..................
From: Branch
To: Region / Circle/ Credit Review -RMG
Log of Special Covenants
For Year
Sr# Customer's Name Date of Approval Special Conditions Target Date Compliance Date Remarks
Signature
239
Credit Handbook
Section 5
Collateral Management
&
Controls
240
Section 5
Collateral Management and

Controls
5.1 Collateral Management Guidelines
5.2 Legal Documentation
5.3 Credit Risk Control and Processes
5.4 Insurance
5.5 Deferral Policy
5.6 Vendor Management
241
5.1 Collateral Management Guidelines

5.1.1 Collateral – meaning and scope
5.1.2 Primary and Secondary Collateral
5.1.3 Types of Collateral
5.1.4 Mortgage and its kinds
5.1.5 Financial Institutions Recovery Ordinance
2001 – Salient Features
5.1.6 Title Documents
5.1.7 Legal Clearance
5.1.8 Valuation
5.1.9 Minimum Margin Requirements on Fixed
Assets held as Collateral
5.1.10 Movable Properties
5.1.11 Hypothecation
5.1.12 Pledge over Movable Stocks
5.1.13 Stock Report
5.1.14 Stock Inspections
5.1.15 Pledge of Marketable Securities
5.1.16 Cash /Near Cash Collateral
5.1.17 Liquidation Procedures for Marketable
Securities & Cash/ Near Cash Collaterals
5.1.18 Other forms of Collateral
5.1.19 Credit Risk Mitigation under the
Standardized Approach to BASEL II
5.1.20 Swapping of Credit Facilities from other
Financial Institutions
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5.1.1 Collateral – Meaning and Scope
Collaterals comprise assets and other forms of securities that secure debt
obligations of customers. As a general policy, the bank essentially lends against
cash flows, which is considered the primary means of repayment. However, if due
to any reason whatsoever, cash flow is insufficient or becomes unavailable, then
collaterals serve the purpose of second way-out.
5.1.1.2 Reasons for Taking Collateral
Clean exposure is not allowed by SBP, which requires that all exposures (more than
PKR 500,000/- for Corporate/ Commercial and PKR 3,000,000/- for SME (Fund
Based not to exceed PKR 2,000,000/-)) must be backed by some tangible or
intangible security with appropriate margins. Exposure without any security or
collateral is treated as clean. Nevertheless, as per SBP PRs, finance extended from
the date of opening of L/C till the receipt of title documents to the goods, and
finance against Trust Receipts are exceptions to the above requirement, and banks
are allowed to decide about collaterals for these two financings, at their own.
Apart from mandatory requirements, bank’s primary interest lies in timely

repayment of principal along with markup. Adequate collateral safeguards against
loss incase borrower defaults and is used to fund repayment (second way out) when
cash flows (first way out) are short/ become unavailable.
5.1.1.3 Eligible collaterals under Standardized Approach to Credit Risk
Where an exposure is secured by eligible collateral and that meets the eligibility
prescribed criteria and minimum requirements, the risk mitigating effect of the
collateral can be taken into account for the calculation of capital requirement.
In this regard there are two approaches:

i) Simple Approach; and
ii) Comprehensive Approach.
Under the Standardized Approach, the bank has exercised the option of using
Simple Approach for CRM whereby limited financial collaterals are available for
capital relief. The bank is in the process of acquiring a Collateral Management
System (CMS) which is expected to be in place in the future (acquisition of CMS has
been deferred due to the bank’s inability to provide timelines for implementation of
SYMBOLS) and to be used going forward when the bank would be performing
parallel run under the FIRB Approach (alongside performing Standardized
Approach capital calculations) when additional requirements of the Comprehensive
Approach to CRM would become applicable.
The data requirement for the simple approach to CRM shall be met by CRMIS and
Capital Calculator.
243
Under the simple approach to Credit Risk Mitigation, in case the risk weight of
the counterparty is higher than the risk weight of the available eligible
collateral1, the risk weight of eligible collateral replaces the risk weight of the
counterparty in whole or in part provided that there is no currency or maturity
mismatch2 between the exposure and the collateral. The risk weight on the
collateralized portion is subject to a floor of 20%. The remainder of the claim is
assigned the risk weight of the counterparty. The 20% floor for the risk weight of
collateralized portion is relax-able up-to 0% provided that the exposure and the
collateral are denominated in the same currency, and the collateral is either
cash / deposit receipt or is in the form of Sovereign / PSE securities eligible for
a 0% risk weight, and its market value has been discounted by 20%.
Where guarantees or credit derivatives are direct, explicit, irrevocable and

unconditional, and the banks fulfill certain minimum operational conditions
relating to risk management processes outlined in the SBP Basel-II Framework,
they may take into account benefit of such credit protection in calculating capital
requirements.
A range of guarantors and protection providers is recognized. A substitution

approach is applicable. Thus only guarantees issued by or protection provided by
entities with a lower risk weight than the counterparty leads to reduced capital
charges since the protected portion of the counterparty exposure is assigned the
risk weight of the guarantor or protection provider, whereas the uncovered portion
retains the risk weight of the underlying counterparty.
For further details, please refer Appendix I to Chapter 5.1 and Section 2.6 – Credit
Risk Mitigation of SBP Basel-II Framework.
5.1.2 Primary and Secondary Collateral:
Collateral should match the purpose, nature and structure of the transaction and
should also reflect the form and capacity of the obligor, its operations, nature of
business and economic environment. Collateral may include assets acquired
through the funding provided, i.e. stocks, receivables, or export bills, as well as
cash, government securities, other marketable securities (such as shares), current
assets, fixed assets, specific equipment, commercial and personal real estate.
Based on the above, collateral can be categorized as follows:
5.1.2.1 Primary Collateral
Primary collateral comprises assets that are acquired / to be acquired through

bank’s financing i.e. hypothecation and pledge of stocks in case of Running
Finance and Cash Finance respectively.
1 Eligible collateral for CRM under Simple Approach is covered in detail in the Chapter on Collateral Management
Guidelines
2 Simplified Standardized Approach criteria as detailed in the SBP Basel-II Framework
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5.1.2.2 Secondary Collateral:
Secondary collateral is over and above primary collateral and it serves the purpose
of additional security. Generally, for short term financing tangible fixed assets i.e.
immovable properties are required as secondary collateral.
5.1.3 Types of Collateral
Collateral may be broadly classified in two types. For further sub classification
please refer to Appendix II to Chapter 5.1
• Immovable properties
• Movable Properties
5.1.3.1 Immovable Properties
The word “Immovable Property” has been defined in the registration Act 1908,
section 2 (6) in detail. For the purpose of this document, it means - land, buildings
and things attached to the earth or permanently fastened to anything attached to
earth; and does not include
• Standing timber, growing crops or grass,

• Machinery imbedded in or attached to the earth, when dealt with apart from the
land.
The phrase ‘attached to earth’ means something in the nature of permanent fixture,
for work, and not removable after a short period / time. Accordingly, machinery of
a factory would fall in the definition of immovable property. However, if the
machinery is treated or dealt apart from the land, like in the case where it is
movable in nature or where machinery is installed over land which is not owned by
the owner of the machinery, then it would be treated as movable property.
However, in cases where machinery is installed over leasehold land and the lessor
has specifically allowed the lessee to mortgage the leasehold rights, then the
machinery will be treated as Immovable Property.
Whenever an immovable property is offered as security against credit /advances, it

would be taken as security by way of mortgage whether registered or equitable and
all other property, being movable property would be taken as security by way of
hypothecation, or specific charge.
From a financing perspective, only private domain immovable properties will be

accepted as security. Private domain includes the properties owned by private
national persons, singular, collective, or the State. Public domain properties will
not be accepted as security.
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Types of Immovable Properties
a. Properties having Land Revenue Record
The record of major portion of the country’s land is maintained under the Land
Revenue Laws. The properties falling within jurisdiction of the said Laws are
identified vide Khewat, khatooni and Khasra Numbers. A Khewat depicts overall
holding (of property) of a land owner or joint land owners in an
Estate/Mahal/Hadbast, which is the area under jurisdiction of a Patwari. A
Khatooni depicts sub holding of a land owner or joint land owners in a Khewat.
Khewat / khatooni numbers are like “Account” and “Sub Accounts”. Whereas,
Khasra Number is basically survey mark of part of the property for the purpose of
identification. A Khasra is constituent of Murabba and Killa.
Measurement Equivalent to
01 Murabba 25 Acres of land
01 Acre 08 Kanals
01 Kanal 20 Marlas
01 Marla 09 Sarsahis
225 Sq. Feet (It varies in some areas, especially in agri land it is 272 Sq.
Feet)
The record in respect of such properties is held with Patwari in Register ‘Record of
Rights’ (Jamabandi), the extract/copy whereof is called ‘Fard’. Record of Rights is a
periodical record; and is updated after four years, the updating of which may alter
the numbers of khewats/khatoonis, on the basis of changes in holdings/sub
holdings; however the khasra numbers generally do not change, being survey
numbers, except in case of Ishtimal (consolidation) or in case of sub division of
Khasra. Any change in the said register is effected through mutation (Intiqal),
which is sanctioned by the concerned Tehsildar/Revenue Officer. The record of
mutations is maintained in the Register Mutations (Dakhil Kharij/Intiqalat), held
by Patwari. The record of mutation is also maintained at the Tehseel Record Office,
the copy obtained wherefrom is called certified copy or “par`t sarkar”; whereas, the
copy obtained from the Patwari record/register is called “par`t patwar”.
Such properties may have title documents like sale deed/ gift deeds/ exchange
deed/ conveyance deed etc. and may not have title documents where the
sale/transfer is made through oral transactions, or the property is inherited.
b. Properties of Public Sector (Government /Semi Government)

Development Authorities
These are the properties which are acquired by government/semi government

development authorities like LDA, KDA, and CDA etc. and then allotted/transferred
to the public. Generally, the title documents of such properties are
allotment/transfer letter. However, these may have title documents like sale deeds/
conveyance deeds etc. also along with allotment/transfer letters.
246
c. Properties of Private Sector Housing Societies;
These are the properties which are acquired by Private Housing Societies and then
allotted/transferred to their members/public. The main record of such properties is
vested with the society concerned. Generally, the title documents of such properties
are allotment/transfer letter. However, these may have title documents like sale
deeds/exchange deeds/gift deeds etc. also, along with allotment /transfer letters.
d. No permanent Record (Shamelat Deh/ Aabadhi Deh)
i. Shamelat Deh
‘Shamelat Deh’ is a piece of joint land designated for the common use of village
communities; and it comprises proportionate shareholding of each land owner in a
village. Such land, however, may be transferred by any shareholder in accordance
with his proportionate share, which nevertheless, breaks the Shamelat; and
proportionate share of each shareholder is reverted back.
For a banker, a piece of property/land falling in shamelat may be acceptable as

security, if the transfer of the piece of property/land is evidenced through a
mutation.
ii. Aabadhi Deh/ Laal Lakir

The expression ‘Aabadhi Deh’ is a term of the Land Revenue Laws, which is meant
for the areas where the record isn’t updated; and stands ceased on the date, when
the relevant provincial government declares the area as such, by way of Gazette
Notification.
Any transfer of property in such an area can only be effected vide registered
document. Inheritance is, however, an exception to the said rule. Nevertheless, in
such a case, it is mandatory for legal heirs of a deceased to obtain declaration from
the court of law to get themselves declared as legal heirs as well as owners of the
deceased's estate.
Branches should be careful while accepting properties that do not have permanent
record. These properties are inherently risky and may have invalid title or may not
be mortgaged due to legal difficulties. However, such properties may be accepted as
valid security subject to condition that clear legal opinion on its title and
acceptability is obtained from bank’s Legal Affairs Division (LAD) before accepting it
as security.
e. Properties of private housing schemes / developers:
These are the properties/schemes, developed by private developers, on the lands

owned by them. The property record of such schemes is generally held with the
land revenue authorities, with the exception of areas falling in Abadi Deh.
Such schemes do not meet the criteria of Cooperative Housing Schemes.

Nevertheless, the relevant Municipal Authorities (or Cantonment Boards) do
247
sanction / approve layout plan of such schemes (or issue NOC); and this is a pre-
requisite for establishing such housing schemes.
These schemes do not fall under the purview of Cooperative Societies. Therefore,
these cannot transfer plots / property to anyone through Allotment/Transfer
Letters, since such documents can only be issued by Societies formed under the
Cooperative Laws. Accordingly, any transfer of property in such schemes should be
affected through registered documents like Sale Deed / Gift Deed etc; and should
be mutated in the land revenue record, also.
In view of the above, the properties falling in such schemes can be accepted as
collateral, if the schemes have been approved by the relevant Municipal Authorities
(or Cantonment Boards); and further, the record of the collateral being offered is
complete in the land revenue record, as detailed in “a” above. (The
Allotment/Transfer Letter, along with NOC, Site Plan, PTM etc. as issued by the
Society / Scheme shall also be obtained, as additional comfort/ security
perfection). However, such schemes if developed in Abadi Deh area should not be
considered as valid collateral, as there would not be any supportive record, in such
a case.
5.1.3.2 Movable Properties
Property of every description except immovable property is called movable asset.
5.1.4 Mortgage and its Kinds
Section 58 (a) of the Transfer of Property Act 1882 defines mortgage as follows;
“mortgage is the transfer of an interest in specific immovable property for the purpose
of securing the payment of money advanced or to be advanced by way of loan and
existing or future debt or the performance of an engagement which may give rise to a
pecuniary liability”.
The transferor is called a mortgagor, the transferee a mortgagee; the principal and
markup/commission of which payment is secured are called the mortgage-money,
and the instrument (if any) by which the transfer is effected is called a mortgage-
deed.
Following are the essentials of a valid mortgage.
Where the principal money secured is one hundred rupees or more,

There should be a written document.
Such written document must be:
o Signed by the mortgagor,
o Properly witnessed, and
o It should be registered. (Equitable mortgage is exception to this rule)
o Stamp duty adequately paid
Legally mortgage may be of various types, however, from bank’s perspective only
Simple (which is also called legal/ Registered/Token/Collateral mortgage) and
Equitable mortgages are used.
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a. Equitable Mortgage
In equitable mortgage mortgagor delivers the bank / bank’s agent, documents of

title to immovable property, with intent to create a security thereon. Memorandum
of Deposit of Title Deeds (IB 24) is obtained as an explicit proof showing intent of
the mortgagor to mortgage in favor of the bank. This type of mortgage is also called
mortgage by deposit of title-deeds.
i. Creation of Equitable Mortgage

In order to create valid charge, mortgagor will be required to surrender all original
title documents to the branch and execute a Memorandum of Deposit of Title Deeds
(IB-24).
Agreement to create registered mortgage is also required in case of equitable

mortgage. This requirement can be waived off by Legal Affairs Division upon
recommendations from concerned Group Head.
After creation of mortgage, relevant land authority will be informed about bank’s
mortgage with a request not to allow any further transaction in respect of the
mortgage property without the bank’s written consent.
ii. Registration
Registration of Equitable Mortgage with the Sub Registrar is optional. However, if

the mortgagor is a Limited Liability Company, then the equitable mortgage charge
will be registered with SECP, evidencing bank’s charge.
iii. Constructive Deposit of Title Deeds:
Equitable mortgage can also be created through constructive deposit of title deeds.
Original Title deeds are held with existing charge holder (usually holding first
charge). In such cases, certified copies of title deeds are deposited along with an
undertaking from the existing charge holder for holding original title deeds
deposited with them in a representative capacity on behalf of MCB. Original title
document holder should also further undertake that the documents will not be
released without prior consent of MCB. This type of equitable mortgage is only
allowed if a specific approval has been granted by the credit sanctioning authority
and relevant documentation has legal clearance.
Equitable Mortgage can only be created in cases where ownership of the mortgagor
is based upon documents that are recognized as “title documents” by courts; and
which are available in original; and no duplicate thereof is possible. Title
Documents include (i) Sale Deeds (ii) Gift Deeds (iii) Exchange Deeds (iv) Partition
Deeds (v) Surrender Deeds (vi) Conveyance Deeds (vii) Lease Deeds etc. which are
registered with the Sub Registrar of Properties. Similarly, Allotment Letters /
Transfer Letters of Semi Government Authorities like LDA, DHA, CDA, KDA, FDA
etc. are also considered as title documents. Allotment Letters / Transfer Letters of
Private Housing Societies may be considered as title documents, subject to
clearance from Legal Affairs Division.
249
Where a property is based upon title documents referred above, however, the
original ones are lost; no equitable mortgage thereof can be affected.
In cases of properties of land revenue record, sale deeds etc. (as referred above) are
considered as the principal title documents; and Fard/Mutation etc. are considered
as supporting documents, which in cases where ownership of the property is based
upon oral transaction (oral sale/exchange/gift) or inheritance, would not be
considered as title documents for the purpose of equitable mortgage.
Court decrees can be considered as title documents subject to opinion from LAD.
Court Decrees may be of many types, like in cases of specific performance (sale /
purchase), partition, arbitration matters, court declaration, etc; and a few of those
may require registration (like in specific performance cases); and it also rest with
the Honorable Courts to decide that registration is required in certain cases. It is
therefore, to be examined in each case that whether registration is required.
Therefore court decrees can be considered as title documents subject to opinion
from LAD on a case to case basis.
Certified copies of original title documents cannot be used as title documents for
equitable mortgage.
Equitable Mortgage therefore can only be created in cases where Original Title
Documents are available and deposited with the Bank; whereas, in all other cases,
only registered mortgage can be affected. For all fresh cases where original title
documents are not held, 100% coverage of finance amount shall be obtained
through registered mortgage/ mutation. In all existing cases of such nature,
registered mortgage amount should be enhanced to 100% on best effort basis
b. Simple/ Registered/ Legal Mortgage
In Legal mortgage, mortgagor/customer does not deliver possession of the

mortgaged property, rather he binds himself personally to pay the mortgage-money,
and agrees, expressly or impliedly, that, in the event of his failing to pay according
to his contract, the bank shall have a right to cause the mortgaged property to be
sold and the proceeds of sale to be applied, so far as may be necessary, in payment
of the bank’s funds. This type of mortgage is also called Legal Registered Mortgage
or Simple Mortgage.
i. Execution
In order to create valid registered mortgage charge, customer will be required to

execute Bank’s standard Mortgage Deed.
After creation of mortgage, relevant land authority should be informed about our
mortgage with a request not to allow transaction in respect of the mortgage
property without the Bank’s written consent.
In case of Registered Mortgage, mortgagor must also surrender all title documents
along with IB 24 (Memorandum of deposit of title deeds).
250
ii. Registration
Irrespective of the type of the customer, all registered mortgages will compulsory be
registered with the Registrar of Properties, also known as the Sub-Registrar, under
Section 17 of the Registration Act, 1908.
If mortgagor is a Limited Liability Company, IB-24 will be executed and the

documents will be registered with SECP, evidencing bank’s charge.
Stamp Duty & Registration Fee are required to be paid for the registration of
charge.
c. Token Registered Mortgage
When finance is allowed against equitable mortgage, as per requirement, revenue

authorities do not mark mortgage mutation in bank’s favor in their record.
Accordingly, to strengthen Bank’s position Token Registered Mortgage is obtained.
When the Bank’s exposure is fully secured through equitable mortgage and name
of the Bank as mortgagee is properly recorded in Revenue Record (Record of Rights)
vide a mutation, then it is not necessary to obtain additional token registered
mortgage over the property. Documentary evidence to this effect should be kept in
safe custody along with original title deeds and other related documents. Before,
allowing any disbursement, the mutation should be verified by obtaining certified
true copy thereof from Naqool (copying) agency to the satisfaction of Legal Affairs
Division/ Legal Counsel on bank’s panel.
In instances where properties are owned by third parties, appropriate securing

documents, such as memorandum of deposits of title deed (IB 24) and Mortgage
Deed duly signed by third party mortgagor, should be obtained. Branches should
ensure verification of the signatures. The documents should be signed by the third
party mortgagor in presence of branch manager / bank officer and the same is
verified with original CNIC, retaining the photocopy of CNIC for branch record along
with recent photograph, where photograph in CNIC is not updated. Of the two
witnesses required in the “Mortgage Deed”, one should be from borrower /
mortgagor’s side whose CNIC photocopy should also be retained; and one should be
from the Bank’s side. In case, the witnesses are female, two signatories shall be
necessary in order to comply with the requirements of Article 17 Qanoon-e-
Shahadat Order, 1984 (P.O.10 of 1984).
The guidelines on security / documentation aspects relating to property financing

are only broad outlines and branches should wherever necessary, seek appropriate
legal advice / clearance, on specific cases, from Legal Affairs Division / Ex-House
lawyers on Bank's approved panel, prior to finalizing the security documentation /
other security aspects.
d. Post Mortgage Requirements
Noting/ Marking of bank’s charge is required to serve as notice to subsequent

lenders or any other person having interest in that property. In all cases of
Mortgage, Noting/Marking of bank’s charge/mutation will be arranged with
251
concerned Records Offices and documentary evidence of noting / mutation will be

kept with security documents.
5.1.5 Financial Institutions Recovery Ordinance 2001 - its salient features
No blank documents signed by the customer to be held.
As per section 18 (1), no financial institution shall obtain the signature of a

customer on a banking document which contains blank columns in respect of
important particulars including the date, the amount, the property or the period of
time in question. Branches / CRC should ensure that no blank documents signed
by customer to be held on record.
Attestation: Finance agreements executed by or on behalf of a financial institution

and a customer shall be duly attested in the manner laid down in Article 17 of the
Qanun-e-Shahadat Order, 1984.
One of the two witnesses should be from borrower’s / mortgagor’s side whose CNIC
photocopy should also be retained; and one should be from the Bank’s side. Bank’s
official signing on behalf of the bank must give his AS/ IBS/ Employee Number.
This requirement shall be fulfilled on all documents requiring the witness formality.
Sale of mortgaged property
Recovery Ordinance gives certain statutory powers to Financial Institutions in lieu

of defaulted loans, including sale of the mortgaged property, whereby a financial
institution may, without the intervention of any Court sell the mortgaged property
or any part thereof by public auction for adjustment of defaulted loans after
complying with conditions as laid down in the ordinance.
For purposes of execution and registration of the sale deed in respect of the
mortgaged property, the financial institution shall be deemed to be the duly
authorized attorney of the mortgagor and a sale deed executed and presented for
registration by duly authorized attorneys of the financial institution shall be
accepted for such purposes by the Registrar and Sub-Registrar.
Exemption from requirement of Irrevocable Power of Attorney
Irrevocable General Power of Attorney
Banks as a general practice obtain Irrevocable General Power of Attorney (IGPA)

from the mortgagors, in respect of their mortgaged properties. It is obtained for two
reasons (a) to have powers to sell the mortgaged properties in case of default; and
(b) to have powers to convert equitable mortgage into legal/simple mortgage, if
desired.
The present banking recovery law i.e. Financial Institutions (Recovery of Finances)
Ordinance, 2001 has covered the aspect of sale of mortgaged properties by banks
itself, whereby if a bank opts to sell the mortgaged property, it can do so without
intervention of courts; and in addition, a bank in such a situation is considered by
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law as Attorney of the mortgagor. Accordingly, there is no need to obtain IGPA from
mortgagors in context of the subject powers. Given that Equitable Mortgage is as
good as Legal/Simple Mortgage, if perfect, therefore, there is no need for conversion
of equitable mortgage into Legal/Simple Mortgage.
Furthermore, IGPA before June, 2006 involved a nominal amount of stamp duty
and registration fee which has now been changed and the Registering Authorities
insist upon payment of CVT on IGPAs (at the rate of 2% of value of the property) as
levied by the Federal Government on transfer of properties.
In view of the above, it has been decided by banks (at the level of PBA) to
discontinue this practice. Accordingly, the requirement of obtaining an IGPA has
been dis-continued at MCB.
5.1.6 Title Documents
“Document of Title” should be of such nature that the deposit thereof would render
the mortgagor unable to transact the property.
• The title deed of a property is generally the document by which the

property is acquired.
• A sale deed in favor of the borrower is a title deed but not a copy of the
Fard / Jamabandi / Intiqal in which there is an entry that the borrower
is the owner of the property.
• A map or a tax receipt does not qualify as a title document.
The property being offered as security should have an absolute, exclusive and clear
title. Mere holding of title documents, or having possession of a property, does not
necessarily mean a valid title. By law, a mortgage with the defective title is invalid.
In this context it is important to look into the documents of the previous owner of
the property to establish that a valid title has been transferred to the present
owner. Moreover obtaining the chain documents, in original, prevents the previous
owner(s) to misuse these documents.
Court decrees can be considered as title documents subject to opinion from LAD on
a case to case basis.
A list of documents required for mortgage is given below. If any of the documents
listed below is missing, guidance from Legal Affairs Division/ legal retainers should
be obtained.
• Title document i.e. Letter of allotment / Inheritance Deed / Sale Deed /

Gift Deed / Permanent Transfer Deed (PTD) etc.
• Chain of documents to establish title (Please refer to Appendix III to
Chapter 5.1 for documents required with respect to types of properties).
• Approved site plan.
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• Approved Building Plan.

• Completion Certificate.
• No Objection Certificate / permission to mortgage from concerned revenue
department or society. Checks should be performed to confirm that the
property should not be under any dispute and there should be no dues
outstanding against it. Accordingly, relevant certificates should be
obtained from the appropriate authorities to determine that there are no
outstanding payments of taxes/rates due on the property.
• Non-encumbrance certificate (NEC)/search certificate. Non-
Encumbrance/Search Certificate is obtained from the Registrar of
Properties or Assurance/SECP to ensure that the property has not already
been charged in favor of some other bank/financial institution/creditor.
• Conveyance Deed (in case of property on allotted plot).
• Independent valuation of property by Bank’s approved evaluator.
• Visit report of responsible officer of the Bank and recent photograph of the
mortgagor where photograph appearing on CNIC do not serve the personal
identification purpose.
• Any other document as required by Legal counsel on bank’s approved
panel/ Legal Affairs Division
5.1.7 Legal Clearance
Legal opinion from banks own legal department or legal counsel on bank’s
approved panel is required at two stages
a. Legal opinion on title of property
It is required when borrower offers a property as security. It establishes that

depositor of collateral/ property has a valid title and collateral/ property offered is
a valid security from bank’s perspective.
b. Final Legal opinion/ Clearance
It is required before disbursement stating that documentation is complete, all legal

formalities have been completed and security is perfect.
Legal opinion on bank’s standard documents will not be required. CRC will ensure
that they are properly filled in and registered (where required). Where CRC services
are not available, Branch Managers will perform this function.
A legal opinion on title of a property preferably should have following elements:
• Identification of the present owners.

• Identification of the previous owners.
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• Details as to the mode of transfer of the property, in favor of the present owner
i.e. whether it is sale, gift, exchange or relinquishment’ and how the transfer
has taken place i.e. whether it is through documents (registered or unregistered)
or through oral transfer or through inheritance.
• Details of the present owner and previous owner’s documents of transfer.
• Complete description of property’s Khewat/ Khatooni / Khasra numbers /
allotment / transfer letter numbers, tax numbers etc. and exact measurement
thereof.
• Observation as to whether the owner is holding proprietary rights, or vested
rights, in the property.
• Whether NOC / permission to mortgage is required from some office / authority.
• Whether the property is clear from any earlier charge, or there are outstanding
dues payable in this context.
At present in all cases where total exposure of an account is more than or
equivalent to PKR 10 million, legal opinion on title documents and final vetting
certificate is required from Legal Affairs Division (LAD). However, first legal opinion
as to the title of fresh collateral securities for any amount will be dealt by LAD and
there will no outsourcing in this regard. LAD shall provide detailed opinions,
without any qualification, pointing out all the lacunas & remedies thereof. They
also advise the requisite documentation at the very outset, which will help the
field/panel lawyers to execute flawless documentation. Further, if in any particular
account below PKR 10 million, where Business / Risk Management specifically
require legal vetting and opinion from Legal Affairs; Legal Affairs will facilitate the
same. The threshold of PKR 10.000 Mn can be changed with the mutual consent of
business units and Legal Affairs Division.
For exposure below PKR 10 Million legal opinion can be obtained from Ex-house
legal counsel/ legal retainer on bank’s approved panel
Under consortium finance arrangements legal opinion from transaction lawyer will
be acceptable.
List of legal counsels at the panel of MCB shall be circulated to all concerned by
LAD.
It is responsibility of business units to ensure fair distribution of work among Ex-

House legal counsels. Management of concentration risk arising from utilization of
services of Ex-House legal counsels will also be responsibility of business units.
In case business units disagree with legal opinion provided by Legal Affairs
Department, they can seek second legal opinion from Ex-house legal counsel on
bank’s approved panel subject to following conditions.
• Approving Authority for decision to obtain second legal opinion will be as follows
o SCO 2 for Corporate Commercial Customers.
o Group Head RMG for Corporate Large Customers.
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• Proper Justification must be provided for seeking second legal opinion.
• Sanctioning Authority will decide regarding acceptance of either of two legal

opinions.
5.1.8 Valuation
Valuation of assets held as security is an important function, as it has a direct

bearing on the amount of loss that the Bank might have to suffer in the event that
the borrower defaults. Guidelines regarding Valuations of fixed assets are given in
Chapter 5.6.
5.1.8.1 Valuation of Stocks in Trade / Shares / LCY Deposits / FCY

Deposits etc.
Stocks are to be valued at cost or market value, whichever is lower, except where
otherwise notified. Imported goods shall also be valued similarly at C&F cost plus
regular port dues/import duties (exclusive of sales tax), subject to the condition
that the same do not exceed price on local market.
In addition to above, valuation for specific nature of collaterals comprising of stocks

and cash/near cash securities along with valuation frequency and relevant criteria
to be used for valuation is given below.
No. Nature of Security Minimum Valuation Criteria

Valuation Frequency
1 Raw Cotton / Phutti / Fortnightly Bench Mark Price (BMP)
Sugar/ Rice etc. Conveyed in latest CRCD circular
OR
cost (invoice price)
WHICHEVER IS LOWER
2 Shares Daily As per daily prices quoted in
Karachi Stock Exchange.
3 Government Securities Bi-annual Encashment Value of securities
on the date of
disbursement/Renewal.
4 NIT Units Bi-annual NAV at the date of revaluation
5 Local Currency (LCY)
Deposits / LCY Deposit
Certificates or LCY Encashment Value of securities
Bi-annual
Receipts.
(Whether held with MCB
or other Banks)
6 Foreign Currency (FCY) From time to time Rates conveyed in latest CRMD
Deposits / Receipts / (Upon change of FCY circular
Certificates. rate in latest CRMD OR
(Held as security for PKR circular) 2.5% below T.T buying rates
financing) At-least on monthly advised by Treasury
basis
(WHICHEVER IS LOWER)
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7 Financial guarantee Guarantees in FCY Rates conveyed in latest CRMD

issued by local/ foreign shall be revalued as circular
bank per CRMD circulars OR
2.5% below T.T buying rates
advised by Treasury
(WHICHEVER IS LOWER).
Any exception shall be allowed at
original approval/ review level,
minimum review level SCO3.
Note: In case of old FCY deposits held since May 28,1998 which are under Bank’s lien, the
valuation of same to remain unchanged at PKR 46 per US Dollar as the policy is not to
allow fresh financing against such deposits.
Check list of Documentation should be properly prepared refer Appendix IV to

Chapter 5.1 General Part B.
5.1.9 Minimum Margin Requirements
Following table should be referred for determining margin requirements on various

type of assets held as security.
No. Nature of Security Margin

1 Residential/ Industrial Property 30 % of Market Value (MV)
2 Commercial property 30 % of Forced Sale Value (FSV)
3 Agricultural Property 50 % of Forced Sale Value (FSV)
4 Raw Cotton / Phutti / Sugar/ Rice etc. As per latest CRCD circular
5 Shares As per latest CRMD circular
6 Government Securities
7 NIT Units
8 Local Currency (LCY) Deposits / LCY
Deposit Certificates or LCY Receipts. 5% (net of Zakat & withholding tax-
(Whether held with MCB or other Banks) where applicable)
9 Foreign Currency (FCY) Deposits /
Receipts / Certificates.
(Held as security for PKR financing)
10 MCB AMC Dynamic Cash Fund and Cash 7.5% (net of Zakat & withholding tax-
Management Optimizer Fund where applicable)
11 Financial Guarantee issued by local/ Relevant Credit Approval/ Review
foreign bank authority shall decide minimum margin
requirements
12 Hypothecation of stocks/ receivables 25 %
13 Pledge of stocks other than mentioned 15 %
above
In continuation to above, where minimum margin requirement is stipulated for a
specific facility/ sector/ goods/ module/ section of Credit Handbook/ SBP, same
will be applicable.
Relevant approval/review authorities can place higher margin requirements

keeping in view location of the property, nature of asset and risk profile of the
customer.
For Guidance on calculation of margin please refer Appendix V to Chapter 5.1
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5.1.10 Movable Properties
Assets of every description except immovable assets are called movable, this may
include:
• Tangibles; like goods, stock, machinery; marketable securities, etc. or
• Intangibles; like book debts, receivables, etc.
Types/ Nature of Charges/ Securities
5.1.11 Hypothecation
Hypothecation is a legal transaction where borrowing is made against goods which

are charged in favor of the Bank as security; however, the ownership as well as the
possession of the goods remains with the borrower. If the borrower fails to repay
the loan, the Bank can set-off its obligation by liquidation of hypothecated asset
after obtaining court order.
Associated Risks
i. Low control over goods (possession with the borrower).

ii. Difficult to verify title to the property.
Following should be given due consideration in case of hypothecation of stocks:
• Where finance is secured by inventory,

a. Ascertain that the goods are of stable value,
b. Readily marketable, and
c. Borrower has valid title to the assets.
The Bank should avoid financing against high-risk items, such as
perishable/hazardous and government banned commodities or goods whose
prices are usually subject to wide fluctuations.
• Where security comprises of seasonal goods, repayment of finance should be

effected by customers before the end of season. For commodities, whose season
is not described in Credit Handbook; approving authority shall define clean-up
period & full adjustment date in Approval of Finance.
• CRCD conveyed prices should be taken into account while assessing the
quantum of finance to be extended against the merchandise hypothecated, after
deduction of the stipulated margin. For all those commodities whose prices are
not conveyed by CRCD, Invoice price or market price, whichever is lower, shall
be used.
• Since possession of goods remains with the customer, such form of security
should only be considered for high value customers.
• Where finances are extended to listed companies, hypothecated stock statement

would be verified with quarterly financials of company. For other types of
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borrowers stock statement would be verified with annual financials. This

requirement is in addition to physical stock inspection.
The following should be given due consideration in case of hypothecation of
debtors/receivables:
• Since real time check for amount of receivables and objective evidence of the
debtors is difficult to obtain. So such security should only be considered for
high value customers.
• The age of the debt is an important aspect, where finance is secured by Account
Receivables. In this case proper ageing of the receivables should be obtained
from the customer and must be critically analyzed.
• Where finances are extended to listed companies, statement of book debts

would be verified with quarterly financials of company by relevant branch/
relationship manager and further reviewed by Credit Review Division at the time
of approval.
Documentation
Ensure appropriate security documents are arranged and also ensure validity of
the documents. In addition to finance agreements, following document(s) should be
obtained.
For hypothecation of stocks, standard letter of Hypothecation (IB 25-A).
For hypothecation of book debts/ Receivable and machinery, draft to be
obtained from Legal Affairs Division
Insurance
The hypothecated/pledged goods should be adequately & comprehensively insured

against all the usual hazard/ risk as per section 5.4 of the handbook.
Stamp Duty
Stamp duty should be recovered from the borrower for IB 25-A & Letter of
hypothecation of book debts/ Receivable/ Machinery
Enforceability
Possession & sale of goods shall be arranged via Court.
Charge Requirements
In case of limited companies, Bank's first / or ranking (as per Approval for Finance)
charge over the borrower's entire stocks/ book debts/receivables should be
registered with SECP.
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5.1.12 Pledge over Movable Stocks
The bailment of goods as security for payment of debt or performance of a promise

constitutes to pledge. It envisions physical delivery of the pledged property being
given to the pledgee (Bank). Pledge provides the bank with actual possession of
goods.
Types of Pledge
Pledge can be classified on the basis of godowns and storage conditions into the
following two categories:
i. Pledge:
Pledge means that the goods are kept in covered godowns under lock and key
arrangements.
ii. Open Pledge:
Open pledge means that the goods are kept in an open place and control over the
pledged goods is affected at the main gate of the factory/godown premises. Keeping
in view the relatively high risk involved in open pledge, this should only be allowed
to high value customers.
Due consideration should also be given to the factors specified in the hypothecation
section.
Documentation
In addition to finance agreements, standard Letter of Pledge (IB-26) is to be

arranged.
Insurance
Same as for hypothecated goods.
Miscellaneous
• In case finance is primarily secured against pledge of stocks, secondary

collateral is required which should be 25 % of limit/ finance amount. The
collateral (property) shall be taken at Market Value (MV).
• In case of a limited company, in addition to pledge, a ranking charge on

current Assets (other than those pledged with bank)/ Fixed assets should
also be obtained. Waiver (if required) may be obtained from the relevant
approval/review authority.
• For all other borrowers, where registration of charge is not possible, in

addition to pledge, letter of hypothecation should invariably be obtained
covering stocks and book debts.
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Enforceability
The Bank is required to give notice of its intention to sell the pledged goods to the
borrower. The notice period should be 15 days. The notice requirement is statutory,
thus, even where the pledge agreement stipulates that the Bank may sell without
notice, this statutory requirement must be fulfilled. On case to case basis, advice to
be obtained from Legal Affairs Division.
Stamp Duty
Required for IB 26.
Precautions Regarding Pledge of stocks
Please refer Appendix VI to Chapter 5.1 for Guidance.
5.1.13 Stock Report
Client Stock Report on Hypothecated Stocks
It is mandatory requirement (SBP PR-12) to obtain monthly stock statements from

borrower containing bank-wise break-up of outstanding with the total value of
stocks and receivables there against in case of Pari Passu charge. Accordingly,
stock statement providing bank-wise details of outstanding against hypothecated
stocks/receivables and value of stocks/receivables there against (as detailed in
Appendix VII to Chapter 5.1) should be obtained on monthly basis. Stock
statements should be carefully analyzed and Drawing Power should be calculated
from the same.
Where clients fail to submit these, Relationship/Branch Managers are required to

follow-up, preferably through reminder letters.
• The first reminder will be sent not later than 5th of the month in which the
report is due and the second letter one week later.
• Non-submission of stock statements should be highlighted in a Call Report and
customer should be sent repeated reminders. Copies of reminders should be
filed in the Credit File.
Stock Report of pledged stock and stock Register
On routine basis, Muccadum is required to provide stock report on bank’s

prescribed format (Appendix VIII to Chapter 5.1) by the 3rd working day of each
month (or earlier / daily basis where specified by branch e.g.; seasonal finance).
However, in case of change in inventory (quantity & value of stock) stock report will
be received with in one working day of such change. Muccadum will provide stock
statement to the Bank as per the following schedule:
i. at the time of takeover of pledge site,
ii. at the time of movement of stock, either in or out,
iii. at every month-end, irrespective of any stock movement during the
month.
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While submitting stock statement to the Bank, it shall be mandatory for

muccadum to obtain Borrower’s authorized signature on the stock statement.
The stock report should convey all essential information inclusive of location and
ownership of the place of storage, specification, unit of measure, opening stocks,
closing stocks, receipts and delivery, value of stocks and the drawing power. Where
opening stocks remain unchanged, date of last change should be mentioned.
i. Supervisors / Managers / Owners of Muccadumage firms shall record the

details of verifications / observations made during their visit of the Godowns
in Godown Register.
ii. Godown Register shall be considered Bank’s property. Muccadum’s
supervisory staff will visit each site at least once every fortnight, or earlier,
where considered necessary.
iii. Godown register must be maintained properly and should be checked by the
inspecting executives / officers that incoming and outgoing stocks are
accurately recorded in Godown register. The visiting bank staff / executive
should sign the register and shortcomings, if any, should be pointed out and
noted in the register. A Godown visit report should be prepared and submitted
/ kept at branch and endorsed to next line authority as well.
Pledged stocks to be valued at cost or market price whichever is lower. Rates

circulated by CRCD will be used for calculating market value. For commodities
where rates are not circulated by the CRCD. It will be the responsibility of Business
Units to acquire market rates for valuation purposes.
5.1.14 Stock Inspections
Hypothecated/ pledged stock inspections should be arranged as per prescribed

schedule (Appendix IX to Chapter 5.1) preferably with an element of surprise.
Where necessary, a higher frequency may be specified in the credit proposal; or
approving authority may require this in Approval of Finance. Care should be taken
by randomly examining / counting / weighing the individual items and arriving at
exact calculations, by applying the current market prices of such goods. While
checking the security comprising of pledged/hypothecated goods, it is important to
ensure that the goods have not deteriorated in value, due to aging and/or other
factors, resulting in inadequacy of security vis-à-vis credit facilities offered.
Pledge Sites Inspection Before Disbursement
Site Inspection must be undertaken before disbursement. Stock inspection report

should be filed in relevant section of Credit File. Any discrepancies like non
availability of firefighting equipment, improper stacking, unacceptable stocks
condition, non-standard procedures being followed at site as discussed above, be
checked and action should be taken to rectify the same & reported to Regional
/General Manager immediately.
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i. All such discrepancies must be removed by the borrower before loan is

disbursed. Once a loan is disbursed, it is usually difficult to get the
faults/discrepancies rectified.
ii. Where necessary borrowers should be asked to provide authentic laboratory
report of various goods coming under pledge to ascertain the condition and
value of stocks. If necessary, independent Laboratory Report may be obtained.
iii. Borrowers to provide weight sheets. Where applicable, test weighing to be
carried out for phutti/paddy in sacks (boras), and cotton bales etc.
iv. Quick action should be taken on the observations/weakness observed on the
sites and highlighted by the Muccadums. The short coming should be
communicated in writing.
Precautions for arranging Stock Inspection of Hypothecated/ Pledged Stocks
Appendix IX to Chapter 5.1 lays down frequency for periodic stock inspection of
both hypothecated and pledged assets to be undertaken by various levels in all
Business Groups. The hypothecated/pledged merchandise will be checked against
branch records and a written Stock Inspection Report (Appendix X to Chapter 5.1)
will be filed in credit file of the customer.
Contents of the Stock Inspection Report
Stock inspections provide us an opportunity not only to assess the adequacy of

stocks securing our exposure, but also to monitor on a regular basis the following:
1. Stock break-up.
2. Quality of collateral.
3. Evidence of ownership.
4. Quality of warehousing.
5. Adequacy of fire-protection devices.
6. Adequate protection from theft / burglary.
7. Condition at the premises.
Inspection Administration Process
Stock inspections are carried out in accordance with the frequency laid down in
Appendix IX to Chapter 5.1 or as per Credit Approval. Credit sanctioning authority
may set a higher frequency keeping in view risk of obligor.
1. CRC to advise the Branch Manager/ Relationship Manager at least one month
in advance of the inspection requirement.
2. The report is to be circulated to the CRC/Regional Manager/General Manager
and a copy is filed for reference and same be recorded in stock register.
3. Stock Inspections at GM level shall be carried out as per Appendix IX to
Chapter 5.1. However, GM may sub-delegate a reasonable number of stock
inspections:
• To bank employee with required knowledge/skills to conduct stock
inspections
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• To independent valuator (at approved panel of MCB)

4. Business Heads should monitor whether stock inspections have been done in
accordance with Appendix IX to chapter 5.1. he should also conduct random
inspections in order to verify the inspection reports.
While delegating stock inspections, GMs must ensure that at least 50% of stock
inspections are carried out by themselves. Sub-delegation is not allowed to
Incharge Advances, Branch Managers and Regional Managers. CRC must follow-up
with the Branch Manager when the inspection report is not received on time.
Joint Inspection of Stocks/ Multiple borrowings
There are instances when borrowers avail finance from more than one bank against
identical securities. In such cases financing banks are exposed to additional risk,
which can be mitigated by proper co-ordination & co-operation amongst the banks
and incorporating appropriate check and precautions as follows;
i. Such multiple borrowings can be identified by conducting charge search with

SECP (in case of limited companies) and exchange of information with local
banks / other bankers of the borrower.
ii. Where eCIB/ BBFS/ Latest financials of the client report indicates exposure
greater than our financing, the other bank(s) and security (ies) there-against
should be identified.
iii. Information about pledged / hypothecated stocks, wherever, multiple

borrowing is identified, should be exchanged at least on quarterly basis
among Banks / FIs.
iv. Joint stock inspection to be conducted at least once a year on best effort
basis. Banks with highest exposure against the common security may be
requested to serve as coordinator for such inspection.
v. Muccadums posted at such sites should be cautioned to ensure that stocks

pledged in favor of MCB are not commingled with stocks pledged with other
banks and proper signboards are fixed.
vi. In case of pledged stocks under lock and key, the borrower should be required
to partition the godown with masonry blocks so as to ensure that there is no
common access to the godown.
5.1.15 Pledge of Marketable Securities
Marketable securities comprise of assets/securities that can be easily converted

into cash. Such securities can easily be traded or converted into cash at a
reasonable price at any time.
An effective pledge of marketable securities should ensure the following:
i. Actual possession of the securities by the bank.
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ii. Power to dispose off the securities, without approval of the owners/
depositors (before disposal; 15 days prior Notice should also be given)
Documentation Required
In addition to financing agreement standard pledge documentation (IB-28 & IB-

31) should be held.
Irrevocable encashment / set-off authority in bank’s favor should be held. Allowing

the bank to encash security without reference to borrower in case of non-payment
of principal/ mark up.
a. Important Points
i. Securities in un-marketable lots or stocks/shares not quoted on the Stock

Exchange shall not be accepted.
ii. Bank’s lien should be perfected on the securities. The lien should be notified
with the security issuing Agency e.g. in case of DSCs, SSCs, RICs lien should
be marked on securities by National Savings Center or the bank issuing such
security on behalf of Government. Said lien is also noted in the books of the
issuing office.
iii. Objective should be to ensure that, in case of need, all such securities can be
sold by the Bank, without experiencing any difficulty/legal impediments.
iv. Signature of discharge should be obtained from the depositor (pledger). The
signatures should be verified from security issuing office.
v. Every precaution should be taken to verify that the securities are not forged or
stolen and that they are genuine. The securities should also be in reasonably
good condition, not mutilated or torn.
vi. Securities (scripts) should be kept in safe custody under dual control and
proper entry should be made in safe custody register.
vii. Before allowing approval for acceptance of marketable security sanctioning

authority should be satisfied that financing against the securities are not
prohibited e.g. at present financing against behbood certificates is not
allowed.
viii. While accepting instrument or other such type of securities, which have
dividend/profit coupons, attached to them, the Bank should ensure that all
the coupons are duly attached and kept in safe custody.
ix. Credit facilities may be allowed beyond the maturity date of deposit receipts
but date of expiry of finance should not be later that six month from the
maturity date of the deposit receipts unless where specific waiver is held in
this respect. During such period, it should be ensured that Bank’s right / lien
over the deposit receipts remains effectively in place till such time the Bank’s
exposure is adjusted or alternate security is arranged. Where financing
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facilities are allowed against MCB’s own deposit receipts roll over instructions
till maturity of finance must be obtained from customers.
x. In case of financing against deposits or instruments issued by other financial

institutions, line allocation approval should also be obtained from FIID before
allowing disbursement.
xi. Facility Advising letter should contain Top Up clause and acceptance thereof
should be held from customer. This clause can be waived at level of SCO 2.
xii. It is MCB’s policy not to allow financing against Bearer or non-registered

instruments.
Financing against Special US Dollar Bearer Bonds / Certificates issued by

MCB Branch was allowed as an exception. These Bonds were issued for seven
years in 1998 and have now expired.
b. Miscellaneous:
The Bank is required, before selling the subject matter of the pledge, to give notice
of its intention to sell to the defaulter / borrower. The notice period should be 15
days. This notice requirement is statutory, thus, even where the pledge agreement
stipulates that the bank may sell without notice, this statutory requirement must
be fulfilled. Necessary guidance to be obtained from Legal Affairs Department on a
case to case basis.
5.1.16 Cash / Near Cash Collateral
For MCB’s internal purposes Cash/Near Cash Collateral include the following:
• LCY deposits;
• FCY deposits;
• MCB AMC Dynamic Cash Fund/ Cash Management Optimizer Fund Growth
Certificates
• DSCs/SSCs/ RICs and Govt. of Pakistan securities;
• Rated Bank COIs, where FID can give line allocation against the said FI; and
• SBLCs or guarantees of banks for which FID line allocation can be obtained.
Documentation Requirements
Cash/ Near Cash Documents required (In addition to Financing

Collateral Agreement)
MCB’s own deposit CF-19 (Signed by depositor, Borrower or 3rd party as the
PKR/ FCY case may be)
Lien should be marked in banking computer system/
books
Other Bank’s Request letter by depositor (Borrower or 3rd party as the
Deposit PKR/ FCY case may be) to mark Lien in MCB’s favor with
authority to MCB to exercise setoff.
Confirmation from other bank that lien has been
marked in MCB’s favor and will be paid to MCB on first
Demand without referring to depositor
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MCB’s Own Deposit Pledge of Original Deposit Receipt along with

Receipts endorsement in bank’s favor.
Letter of Lien (IB-28 & IB-31) from depositor (Borrower
or 3rd party as the case may be).
MCB AMC Dynamic Confirmation of lien marking from MCB AMC
Cash Fund/ Cash Pledge Form “F1”
Management Request letter by depositor (Borrower or 3rd party as the
Optimizer Fund case may be) to mark Lien in MCB’s favor
Growth Certificates Authority for encashment
Letter of Lien (IB-28 & IB-31) from depositor (Borrower
or 3rd party as the case may be)
(For other details, please refer to circular CRMD circulars
issued from time to time.)
Other Bank Deposit Pledge of Original Deposit Receipt along with
Receipts/ COI’s/ endorsement in bank’s favor.
NSC Certificates etc. Request letter by depositor to mark Lien in MCB’s favor
Letter of Lien (IB-28 & IB-31) from depositor.
Confirmation from other bank that lien has been
marked in MCB’s favor and will be paid to MCB on first
Demand without referring to depositor.
SBLCs or Guarantee verification to be obtained from issuing
Guarantees (Local/ bank’s head office/ controlling office. In case of foreign
Foreign) guarantee, text of guarantee should be obtained
through authenticated swift message,
Text of Guarantee to be vetted and cleared by bank’s
Legal Affairs Division on a case to case basis.
FIID line allocation to be obtained.
Due date diary should be maintained for proper
monitoring purpose.
Expiry of the facility should be within the claim
lodgment period of the guarantee.
Stamp Duty should be recovered in case of CF 19, IB 28 & 31.
Important Points
i. The original deposit receipt(s), duly endorsed, should be held by the Bank,
with lien marked thereon, in its favor.
ii. Lien should be marked in system / books in case of MCB’s own deposit and it
must be ensured that it remains intact till adjustment of finance.
iii. The deposit receipt should preferably be in the name of the borrower and
"Caution" should be marked in the books / system/ register, as appropriate.
In cases, where such receipts are in other names, it should be ensured that
the receipts are properly and legally pledged to the Bank with appropriate
documentation.
iv. An appropriate margin should be retained, as per standard

practice/prevailing regulations/ credit policy.
v. At times, a depositor at a branch may request for finance from another

branch of the Bank. The branch allowing the credit facility should register its
lien with the branch holding the deposit, whose acknowledgement should be
obtained and retained in safe custody.
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vi. Deposits receipt offered as security should NOT be in the name of a minor.
vii. In case of exercising right of sell off 15 days notice to be send to the depositor.
5.1.17 Liquidation Procedure for Marketable Securities & Cash/ Near

Cash Collaterals
In the event of non-payment of principal and / or markup by an obligor (by the due
date) 15 days notice should be send to the depositor/ pledger conveying bank’s
intention to exercise the right of realization Following the expiry of the 15 days
notice period, after obtaining approval from relevant GM / Corporate Head,
branches should exercise the right of realization or lodge claim in case securities
are held with another institution
5.1.18 Other forms of Collateral
a. Personal Guarantees
Personal Guarantee of Directors
It is the Bank’s policy to obtain personal guarantee (IB 29) of Directors in case of
Public Limited Companies as well as Private Limited Companies.
Requirement of obtaining PG’s of directors can be waived on case to case basis at

the level of SCO 2. For higher approval/ review levels than SCO 2, sign off from
relevant Approval/ Review authorities will be required. All approvals / sanction
advices shall contain a condition that ‘during the tenancy of MCB’s exposure or
financing arrangement, for any change in directorship – prior consent in writing
must be obtained from the Bank. Otherwise MCB has right to recall the loan /
exposure / financing arrangement immediately’.
As per SBP PR for SME’s, all facilities, except those secured against liquid assets,
extended to SMEs shall be backed by the personal guarantees of the owners of the
SMEs. In case of limited companies, guarantees of all directors other than nominee
directors shall be obtained. Accordingly, Personal Guarantees of owners
irrespective of legal structure of organization should be obtained in case of SME’s.
Exceptions Allowed
• Personal Guarantees will not be required in cases where exposure is 100 %

secured against Cash/ Near Cash Collateral.
• Personal Guarantees will not be required from directors of MNCs (Multi-

National Companies) belonging to Corporate Large Class which has CRR of 1
to 4.
• Personal guarantees of nominee directors shall not be required.
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Personal Wealth of Directors (Net Worth Statement) Requirement on Best effort

Basis
The Bank shall obtain the details of personal wealth – properties etc., along with
the personal guarantees of Directors. It is desired that the branches should try, on
a best effort basis, to obtain such details while accepting Personal Guarantees,
especially in case of fresh facilities.
Such information may be categorized as Declared (D), Verified (V), or Estimated (E).
Availability of similar information in respect of personal wealth – properties etc., of
partners / proprietors will enable the branch to expedite recovery / attachment
process.
b. Guarantees
Bank may lend against guarantee issued by another company. Normally such
guarantees are provided by parent company to its subsidiary or an associate
company. In such circumstances, the credit standing of the guarantor should be
impeccable & memorandum of the company should allow undertaking of a 3rd
party.
In ordinary course of business, a company is not authorized to give guarantee
against its director’s borrowing. Before accepting a company as a ‘guarantor’ bank
should see whether the Article and the Memorandum of Association have allowed
him to do so and the directors signing on behalf of guarantor company are
authorized or not. The authority is delegated through Memorandum and Articles of
Association and through a Resolution of directors.
(Documentation Check List Appendix IV to Chapter 5.1 PART B)
Regarding guaranteed transaction, guarantees would be allowed to be taken as an

eligible credit protection in calculating capital requirements (For details refer to
Appendix I to Chapter 5.1).
Branches while accepting SBLC’s, Guarantees from other banks and Corporate
Guarantees as security shall ensure compliance to all requirements laid down in
Appendix I to Chapter 5.1. Before acceptance of such guarantees, clear legal
opinion from Legal Affairs shall be obtained. Legal Affairs will confirm following
minimum points while issuing legal opinion.
i. A guarantee (counter-guarantee) must represent a direct claim on the
protection provider and must be explicitly referenced to specific exposures or a
pool of exposures, so that the extent of the cover is clearly defined and
incontrovertible. Other than non-payment by a protection purchaser of money
due in respect of the credit protection contract it must be irrevocable; there
must be no clause in the contract that would increase the effective cost of
cover as a result of deteriorating credit quality in the hedged exposure.
ii. A Guarantee (Counter Guarantee) must be unconditional. There should be no
clause in the protection contract outside the control of the bank that could
prevent the protection provider from being obliged to pay out in a timely
manner in the event that the original counterparty fails to make the
payment(s) due.
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iii. On the qualifying default or non-payment of the counterparty, the bank may in
a timely manner pursue the guarantor for any monies outstanding under the
documentation governing the transaction. The guarantor may make one lump
sum payment of all monies under such documentation to the bank, or the
guarantor may assume the future payment obligations of the counterparty
covered by the guarantee. The bank must have the right to receive any such
payments from the guarantor without first having to take legal actions in order
to pursue the counterparty for payment
iv. The guarantee is an explicitly documented obligation assumed by the
guarantor.
NOTE
Branches may accept Guarantees other than Basel Compliant Guarantees subject
to Credit Approval and legal clearance.
5.1.20 CREDIT RISK MITIGATION UNDER THE STANDARDISED APPROACH

TO BASEL II
Basic principles for collateral management

In order to take CRM benefit under the Standardized Approach, the bank will need
to ensure compliance with specific operational and monitoring requirements in
relation to eligible collaterals (as defined above). Some of such significant
requirements, as set out under the SBP Basel II Framework, are as follows:
• The Business Units shall employ a consistent frequency to collateral valuation

as defined under this Handbook. The minimum frequency for revaluation will be
six months for all types of eligible collaterals under the Standardized Approach.
The actual frequency shall be decided considering the above requirement (as
provided in this Handbook) and the Business Units/ CRC shall ensure that all
collaterals are accurately valued as per prescribed frequencies in accordance
with laid out criteria/ mechanism and collateral amounts are duly captured/
updated in the systems.
• Normally the collaterals shall be held for the life of the exposures. This is
necessary to ensure that CRM benefit of collaterals can be taken. In the event of
maturity mismatch in any case whatsoever, CRM benefit will not be taken in
accordance with the SBP Basel II Framework. Similarly only those collaterals
will be allowed for CRM benefit which do not have any currency mismatch with
the exposures.
• Business Units shall consistently monitor the roll-off risks and maturity/
currency mismatch (based on the features available in CRMIS) and take
necessary actions to mitigate the risks, where considered necessary. They will
also monitor the correlation between the collateral value and underlying credit
exposure and report any exception to the competent authorities. This is because
under the SBP Basel II Framework, credit quality of the counterparty and the
value of collateral must not have a positive correlation. For example, securities
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issued by the counterparty or by any related group entity would provide little
protection and so would be ineligible for Basel II purposes.
• The bank shall use effective procedures to control residual risks arising from
the use of CRM techniques (mainly including legal, operational, liquidity and
market risks). In this connection, this Handbook provides guidelines on types of
permissible collaterals, valuation policies/ procedures, management of roll-off
risks and concentration risks etc.
• Collateral concentration should also be periodically monitored by the Business

Units. For this purpose, reports shall be periodically generated (at least on a bi-
annual basis from the bank’s system (i.e. CRMIS etc.) and reviewed. On the
basis of information provided and due analysis, RMG will be authorized to
amend the bank’s collateral guidelines including introduction of new collateral
types, absolute restriction or acceptance with restrictions on certain types. The
impact on the bank’s collateralization strategy shall also be assessed and the
strategy, as contained in the bank’s credit risk strategy document, shall be
updated accordingly.
• The Business Units/ CRC shall monitor the coverage of exposure by the
collaterals (collateralization levels) and the type of charge over collaterals on a
periodic basis and identify exceptions for resolution. Going forward, necessary
fields/ capabilities shall be provided in the existing systems so as to enable
identification of LTV ratios and type of collaterals which is also necessary to
calculate the applicable supervisory LGD under the SBP Basel II Framework,
when the bank will be transitioning to the FIRB Approach.
• CRMD, in coordination with Business Units and TROPS, develop a list of

permitted Mutual Funds which invest in instruments listed under the Simple
Approach to CRM. Such listing shall be reviewed and updated on a regular
basis and circulated to all the concerned quarters within the bank to ensure
that only units in permitted funds are identified as eligible for taking capital
relief.
• Where the bank has a right to set-off, Business Units shall ensure that the
relevant exposures are monitored on a net basis (besides their review/
monitoring on a gross basis).
• The procedures contained in this Handbook have been designed to ensure

compliance with the condition (specified in the SBP Basel II Framework) that the
documentation used for collateralized transactions and for documenting
guarantees remain binding and legally enforceable. There will be a process for
sufficient legal review to verify this and a well-founded legal basis to reach this
conclusion.
• The bank’s legal mechanism by which collateral is pledged or transferred will be
designed in a manner that ensures that the bank has the right to liquidate or
take possession of it in a timely manner in the event of default insolvency or
bankruptcy (or one or more otherwise defined credit events set out in the
transaction document) of the counterparty and, where applicable, of the
custodian holding the collateral.
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• The bank will take all steps necessary to fulfill those requirements under the
law applicable to the bank’s interest in the collateral for obtaining and
maintaining an enforceable interest e.g., by registering it with a registrar, or for
exercising a right to net or set off in relation to transfer of title of collateral.
• The bank will use clear and robust procedures for the timely liquidation of
collaterals at its end. In this connection, it shall be ensured that legal
conditions required for declaring the default of the counterparty and liquidating
the collateral are observed, so that collateral can be liquidated promptly.
Data Quality/ Integrity
The respective Business Units will be responsible to ensure that all the related data
is completely and accurately captured/ updated in CRMIS.
The responsibilities of the dedicated Data Validation Unit (as referred to in section
2.2 of this Handbook) will be extended to review of the collateral data and
supervising resolution of the errors identified (in addition to exposure related
aspects mentioned in that section).
The external ratings for collaterals/ guarantors shall also be captured in the
systems (as soon as done by the ECAI and communicated to the bank) by the
Business Units in order to identify eligible collaterals. The whole process relating to
capture and use of external ratings for customers, as set out in section 2.6 to this
Handbook, will also be followed for collateral ratings, as far as applicable.
Identification of eligible collaterals
CRRS will perform a detailed mapping exercise of each relevant field/ sub-field in
CRMIS with the specific eligible collateral types (consideration will be given to
enhancing the coding structures in CRMIS, where possible/ practicable in case
such identification is not possible with the existing CIF structure). Provision for
manual tagging shall also be provided for types of collaterals in CRMIS where such
tagging is considered more appropriate
Necessary features shall be introduced in the systems for automatic identification

of eligible collateral category based on set of rules supported by detailed mapping of
relevant fields with such categories mentioned above. The above-mentioned
mapping will be adequately documented and will become part of the CRMIS
documentation.
Role of Internal Audit
Internal Audit shall be responsible for reviewing the policies, procedures and
guidelines for collateral identification and data capture (including compliance with
criteria for identification of eligible collaterals) and other aspects of the Collateral
Management Framework particularly collateral revaluation, maturity mismatches,
concentration in collaterals, collateral management, compliance with prudential
regulations etc.
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They will also update the Internal Audit Policy/ Guide in the above-mentioned
respects.
5.1.21 Swapping of Credit Facilities from other Financial Institutions
A swap transaction involves complicated details. After approval of finance, swap

transaction should be undertaken in a manner where the disbursement of the
finance and process of securitization should be conducted simultaneously. However
a situation may arise, where the releasing bank expresses its inability due to its
internal operational formalities to deliver the title documents immediately upon
adjustment of liabilities. In this situation, specific approval shall be obtained from
the relevant Credit approval/ review authority. Following are some precautions/
procedures which should be observed while entering into swap transactions:
‐ Confirmation from the releasing bank should be obtained with respect to the
following ;
• Outstanding amount of the liabilities on a given date.
• List of title/ allied documents for the assets held as security along with
its copies duly certified by them.
• List of legal documentation relating to registered deeds (e.g. Mortgage

Deed, General Power of Attorney etc.) if any.
• Undertaking that original security/title documents will be handed over to

MCB upon adjustment of outstanding liabilities intimated.
‐ All standard charge documents, facility advising letter etc. whatsoever

required in compliance with the covenants, other Terms & conditions of
approved arrangement, shall be obtained from the customer before
disbursement of finance.
‐ Pre mortgage legal opinion should be obtained from LAD over the
property/security documents.
‐ In case of any registered legal documents, the redemption documents shall

be prepared otherwise the releasing bank shall be asked to arrange for
redemption of the security. Necessary arrangements shall be made to sign
the redemption documents on the same day of swap/payment of liability.
‐ An authority shall be obtained from the customer to receive the title

documents from the releasing bank for onward creation of mortgage in favor
of MCB.
‐ Payment of the outstanding amount shall be made through Pay Order in the
name of releasing bank with reference to the customer. Relevant IBs
including Memorandum of Constructive Deposit of Title Deeds (as per draft
available on our Bank’s Portal) shall be got executed from the Customer, at
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the time of originating pay-order in favor of the other bank. (Memorandum

shall be executed by owner of the property, in case of third party collateral).
‐ The pay-order shall be handed over to the other bank, against an

Undertaking in writing that they are holding such and such property
documents (as referred in pre-mortgage legal opinion by LAD) in original,
which shall be handed over to MCB upon realization of the pay-order.
‐ In case of same day release of documents, the equitable mortgage may be

created through MOTD in consultation with LAD.
‐ Upon clearance of the pay-order, all original property documents shall be

collected from the other bank. At this stage, however, it should be ensured
that the documents are in original and as per the legal opinion. In addition,
Redemption Deed(s) (if applicable) shall be got executed from the other bank.
‐ Necessary NOC/Clearance letter shall be obtained from the releasing bank

for the relevant departments like revenue department, excise department,
SECP for registration of redemption deeds for subsequent removal of lien of
the releasing bank. In case there would be multiple charges on assets of a
company by other banks, relevant NOCs should be arranged.
‐ After the completion of transaction and the receipt of the original

title/security documents shall be duly recorded in the safe custody register.
‐ MODTD & Agreement to Create a Registered Mortgage shall be obtained/

executed from the Customer / Mortgagor. Further Token Registered
Mortgage Deed, (if applicable), shall be got executed by the Customer /
Mortgagor; and the same, along with Redemption Deed(s), (if applicable)
earlier executed by the other bank, shall be presented before the Sub
Registrar concerned, for registration. Furthermore, all other formalities of
approval of finance may be fulfilled including the marking of lien in the
relevant departments.
‐ In case of properties involving permission to mortgage, the necessary

permission to mortgage shall be obtained afresh favoring MCB after the
receipt of the title documents.
‐ The removal of lien /satisfaction of charge of the releasing bank and

subsequent lien marking of the charge of disbursing bank may take
considerable time of more than one month. Therefore, necessary deferral for
completion of post disbursement formalities should be specifically built in
with the approval arrangements.
‐ A post mortgage legal opinion/vetting certificate shall be obtained to secure

the interest of the bank.
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5.2 Legal Documentation
5.2.1 Introduction
5.2.2 Company
5.2.3 Types of Companies
5.2.4 Extent of Liability of Directors
5.2.5 Documents required at the Time of
Establishing a Borrowing Relationship with
a company
5.2.6 Collateral in case of Companies – Specific
Features
5.2.7 Types of Charge, Importance and
Limitations
5.2.8 Registration of Charge
5.2.9 Ranking of Charges
5.2.10 Approval for issuance of NOC
5.2.11 Release of Charge / Letter of Satisfaction of
Charge
5.2.12 Documentation under Consortium Finance
5.2.13 Other Types of Borrowers and
Documentation Requirements
5.2.14 List of Documents Required
5.2.15 Documentation Description
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5.2.1 Introduction
While extending credit it is important that the corporate status / structure of the
customer should be clearly established. The corporate status / structure of the
borrower determine what security / collateral and documentation is required to
secure the finances.
A borrower can either be a Company, Firm, Sole Proprietorship, individuals, Trust,

Society, NGO, or Non-Profit Organization etc. A brief discussion of these corporate
forms is as follows:
5.2.2 Company
The Companies Ordinance, 1984 defines a Company as, “a Company formed and
registered under this Ordinance or an existing Company”. (Existing Company
means a Company incorporated under the previous law on the subject i.e.
Companies Act, 1913).
A Company has a number of legal features and characteristics, as defined in the

Ordinance. Some of the important characteristics relevant to topic are discussed
below:
a. A Company is a legal person, which status it attains as soon it is incorporated

under the Ordinance. Following incorporation, it becomes capable of
purchasing and disposing of property, entering into contacts, suing or being
sued etc. in its own name; and capable of performing all the functions which
a Company is authorized to perform, though the functions are performed
through its management.
b. A Company has an existence which is separate, independent and distinct

from its shareholders / members, as well as from the management.
c. A Company has the privilege of limiting personal liability of its shareholders /

members for the business debts / obligations.
d. A Company having a separate personality from its shareholders/members is

itself bound for its debts and obligations; and the shareholders/members are
liable for the Company’s debts/obligations only in case of a Company’s
winding up; and that also to the extent of:
i. amount of value of the shares respectively held by the shareholders,

in case of a Company limited by shares; and
ii. to the extent of such amount as the members may respectively

undertake vide the Memorandum of Association to contribute to the
assets of the Company, in case of a Company limited by guarantee.
ii. A Company has a perpetual succession. Its existence is independent of

existence of its members and directors i.e. the company shall remain, unless
wound up.
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Laws Governing Companies in Pakistan
Companies Ordinance, 1984 and the Securities Exchange Commission of Pakistan

Act, 1997 are the basic laws governing companies in Pakistan. The Ordinance
provides basic principles and procedures of the Company law, whereas, the Act
provides regulatory and monitoring principles of the Company law.
5.2.3 Types of Companies
Generally, companies can be categorized as follows:
a. Company limited by Guarantee
A Company limited by Guarantee means a Company the members whereof

undertake / guarantee vide the Memorandum of Association to contribute a
certain amount to the assets of the Company, in the event if its winding up, to
meet the Company’s debts / obligations. Such a Company may or may not have
share capital.
b. Company limited by Shares
A Company limited by Shares means a Company the shareholders whereof are

liable for the Company’s debts and obligations, in the event of its winding up,
however, to the extent of the amount of value of the shares respectively held by
them.
Companies limited by Shares have further two types, (i) Private Limited Companies
and (ii) Public Limited Companies.
i). Public Limited Company
A Public Limited Company means a Company with limited liability (by shares) that
allows invitation to the public to subscribe for the shares of the Company; and also
allows transferability of its shares. The number of its shareholders can be more
than fifty. However, the minimum number of members and directors of such a
Company should be at least three (03). It is required to use the word “Public
Limited” with its name.
ii) Private Limited Companies
A Private Limited Company means a Company with limited liability (by shares)
which prohibits invitation to the public to subscribe for the shares of the Company;
and restricts transferability of its shares. Additionally, it limits the number of its
shareholders to fifty. Furthermore, the minimum number of members of such a
Company should be at least two (02); and the minimum number of its directors
should also be at least two (02). It is required to use the word “Private Limited” with
its name.
A Private Limited Company may also be of another type of Company i.e. Single
Member Company (“SMC”) which has only one member. It is required to use the
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word “SMC Private Limited” with its name. It is governed by all the provisions
applicable upon a Private Limited Company, except that the number of its members
and directors cannot from one (01). However, it is required that the single member
of every SMC shall nominate a “nominee director” to act as director in case of his
death; and shall nominate an “alternate nominee director” to act as nominee
director in case of non-availability of nominee director.
5.2.4 Extent of Liability of Directors
Directors are shareholders representative and are not liable for the debts /
obligations of the company. Banks obtain personal guarantees of directors of
companies for finances allowed to the companies, especially in case of Private
Limited Companies, so that if companies fail to repay the finances, the same can be
recovered from the personal assets of their directors. Please refer to MCB’s Policy
on Personal guarantees.
5.2.5 Documents required at the time of Establishing Borrowing Relationship

with a Company.
The validity of any act of a company is dependent upon firstly, whether it is within
the powers of the company, as provided in the Memorandum Of Association (MOA)
thereof (or in the Ordinance); and secondly whether the act has been performed by
the management of the company in accordance with the rules and regulations
provided in the Articles Of Association (AOA) (or in the Ordinance). Consequently,
any act of a company contrary to the said aspects would be invalid.
Documents Required
i. Memorandum of Association
MOA is the constitution of a company. It defines objectives and purposes for which
the company has been formed. It also provides basic information about the
company i.e. Name, Registered Office/Address etc; information as to liability of the
members; the amount of share capital with which the company proposes to be
registered, and the division thereof into shares of a fixed amount etc. MOA should
be carefully examined as to any restrictive clause i.e. whether it places any
restrictions on the actions of the company.
ii. Articles of Association
AOA are by-laws for the working and general administration of a company. It
provides the powers and duties of the Directors and Officers of a company. The
AOA should be examined to establish how, by whom; and to what extent the
borrowing powers of a company would be exercised. Generally, AOA of companies
allow the directors to exercise borrowing powers. However, it must be ensured that
the directors may exercise the powers without any restriction.
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iii. Board Resolution (BR)
Generally, all the powers of a company are exercised by its directors, except as
provided in the Ordinance or AOA of a company. However, as regards the borrowing
powers of a company, the Ordinance specifically provides vide Section 196 that the
directors of a company shall exercise the said powers on behalf of the company by
means of a Resolution passed at their meeting. It is therefore, necessary that
whenever a Company requests a financial facility, a copy of the Board Resolution
be obtained in this regard, duly attested by Company Secretary/Director(s).
Similarly, on each renewal / enhancement of the facility (ies), a fresh Board
Resolution should be obtained to cover the aspect of renewal/enhancement.
The Board Resolution should preferably be specific as to bank name, nature and
amount of facility (ies), aspect of renewal / enhancement, nature of securities; and
should specify the company’s representatives, who would sign / execute the
documents. In addition, a BR must confirm that the minutes of the relative meeting
of the Directors have been entered in the Minutes Book of the Company.
A general and open ended Board Resolution may also be accepted in case of
corporate customers (Both in CBBG & WBG), provided the BR covers all the
aspects mentioned above. In such a case, no fresh BR would be required on
renewal/enhancements.
List of documents required. Source for Certified Copy

Memorandum of Association SECP
Articles of Association SECP
Certificate of Incorporation SECP
Certificate of Commencement of Business SECP
(Only required for Public Limited Companies)
Board Resolution to Borrow Company Secretary
Form 29 (List of Directors)/ Form A SECP
Attested copies of CNIC’s of all directors NA
Documentation Check List Appendix IV to Chapter 5.1 (Part A)
5.2.6 Collateral In Case Of Companies – Specific Features
There are specific features of collateral in Company category firstly in terms of

expressions used for collaterals; and secondly in terms of additional requirement
for perfecting the collaterals.
The expressions used for collateral in company category include “Charge” over
Current/Fixed Assets, “Floating Charge” and “Assignment”, which expressions are
based upon nature of the assets under charge.
As regards the additional requirement for perfecting the collateral in company

category, the same are laid down in the Companies Ordinance, including
Registration of the said Charges with the relevant office of SECP
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5.2.7 Types of charges, importance and their limitations
a. Charge:
Charge refers to the security interest created on the property of the company.
A charge is security for the payment of a debt or other obligation that does not pass
‘title of the property’ or any right to its possession to the person to whom the
charge is given.
b. Types of Charge:
i. Fixed Charge:
Fixed Charge means a charge over assets of a company, which attaches to the
assets from the time of its creation.
ii. Floating Charge:
Floating Charge means a charge which floats over assets of a company until an
event of default occurs or until the company goes into liquidation, at which time
the floating charge crystallizes and attaches to the assets intended to be covered by
the charge. Furthermore, its ranking shall be determined when crystallized.
A floating charge is not as effective as a fixed charge but is more flexible.
Distinction between Fixed & Floating Charge
The basic distinction between fixed and floating charges is that a fixed charge
attaches to the asset in question as soon as the charge is created, whereas a
floating charge attaches only when it crystallizes
5.2.8 Registration of Charges
It is mandatory under provisions of Section 121 of the Companies Ordinance, 1984

that every mortgage, charge or other interest created by a company over its assets
should be registered with Registrar of Companies, within 21 days after the creation
of the mortgage or charge.
Effects of Registration and Non Registration
Registration of a mortgage or charge ensures its security in the event of liquidation

or winding up of company. Registration of a charge, as such, constitutes a notice to
the public as to the creation of the mortgage or charge; and if any person acquires
such property, he will be deemed to have notice of the said mortgage or charge from
the date of such registration. If a mortgage or charge is not registered in time, then
it would become void against any other secured creditor (holding registered charge
over the company’s assets). Such a void charge would not be entertained by official
280
liquidator, in case of winding up of the company. Nevertheless, the charge in such

a case will remain payable, but it will be unsecured.
Remedy for registration of a charge out of time
If a charge is not filed within 21 days, then SECP may be applied for extension of
time; and if the Commission is satisfied that it was accidental or due to
inadvertence or due to some other sufficient cause, or is not of a nature to
prejudice the position of creditors or shareholders of the company, or that on other
grounds it is just and equitable to grant relief, then the Commission may on such
terms and conditions as seem just and expedient, order that the time for
registration be extended. In such an event, the mortgage or charge shall be filed
with registrar in the manner above referred, along with a certified copy of the order
of the commission.
Documents required for registration
The following documents are required to be filed for registration of a mortgage or

charge with the Registrar:
Form 10 containing particulars of mortgages or charges etc.

Certified copies of instruments creating the mortgage or charge.
Affidavit that copies of the instruments are true copies.
From X.
Form X should be properly filled-in, it must be signed and stamped by the

company's authorized signatory.
Instruments
Instruments creating the mortgage or charge include mortgage deed/ Memorandum

of Deposit of Title Deeds (IB-24), Letter of Hypothecation (of Stocks, Book Debts,
Machinery/Plant/Equipment etc.). These would be filed in the form of certified
copies, attested by a Notary Public.
Precautions in filing of charges
Make sure the creation date and description of the charge agree with the
instrument
Make sure that ranking of charge is properly mentioned on form X.
Make sure the amount secured accurately reflects what is stated in the
Instrument.
Make sure details of the property charged accurately reflect what is stated in
instrument.
For mortgaged land it is desirable that you give the title number of the
Property.
Ensure that charging clauses are always inserted, including reference to
fixed and floating charges.
Sign and date the form.
Complete the forms legibly using black ink or, preferably, type the form.
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Certificate of Registration
If the Registrar is satisfied that the documents filed are acceptable, then he will
cause an entry in the register of charges; and will issue certificate of registration of
mortgage or charge, which will be considered as evidence of the charge.
Modification of Mortgages and Charges
Whenever the terms or conditions or extent or operation of any mortgage or charge

registered as above are modified, it is mandatory that the particulars of such a
modification together with a copy of the instrument evidencing such modification
be filed / registered with the Registrar. The procedure for modification of mortgage
or charge is same as in case of registration of mortgage or charge, however, for the
subject purpose Form XVI shall be used instead of Form X; and the Registrar shall
issue ‘Acknowledgement of Filing’ instead of ‘Certificate of Registration’.
Modification is change in mortgage or charges i.e. change in:
Amount of mortgage / charge (enhancement or reduction in amount).

Change in particulars of property (excluding or including certain property or
asset).
Variation in the rate of markup or interest.
Extension of time for repayment on period of maturity (Rescheduling).
Change in other terms and conditions.
Rectification of charges, relevant provisions of law and procedure
The following are some of the acceptable grounds for rectification of register of
mortgages or charges:
Omission or mis-statement of particulars.

Failure to file modification of charge.
Omission to intimate payment or satisfaction.
Satisfaction of charges and related Forms
Satisfaction of mortgage or charge is also necessary to be filed with Registrar. It is

caused by way of memorandum of satisfaction of mortgage or charge on Form 17
with or without NOC obtained from the mortgagee/chargee.
5.2.9 Ranking of Charges
Companies may create charge over their assets in favor of more than one lender.
However, the charge of each lender would not be equal. The law in such a case
gives priority to a charge created earlier in time. The priority as such is termed as
Ranking, which determines priority of right amongst company’s secured creditors
to enforce their charge, in case of liquidation. Ranking of a charge is determined by
time of filing of the particulars of the mortgage or charge with the Registrar.
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In view of the aspect of ranking of charges, it is utmost necessary while extending

loan to a company that a Search Report is carried out from the Company
Registrar’s office to ascertain whether the company assets have earlier charge in
favor of some other lender. The search should be conducted by the Bank’s
approved agencies.
a. Terminologies
i. First Exclusive Charge
A Charge is called First Exclusive when it has been created over assets of a
company by a single creditor/lender; and there is no other charge holder having
claim over the said assets.
ii. Second/Inferior
A Charge is called Second or inferior when it is created over assets of a company

which are already under a prior charge.
iii. Pari Passu Charge
Pari Passu charge means a charge under an agreement between the secured
creditors of a company where all the creditors have equal rights of payment; and
have the same level of seniority/ranking, irrespective of date and time of creation of
their respective charges. In case of Pari Passu Charge, every Pari Passu charge
holder shall have a right over respective assets of the company, in accordance with
its proportionate amount of charge/exposure.
Pari Passu charge may be arranged/created amongst creditors of a company jointly

at the time of creation thereof or even in case of inferior ranking charges, by way of
having NOC from the senior creditor.
Under consortium finance usually lenders jointly enter into an agreement with the
borrower to create a Pari Passu charge on assets of the company.
b. Importance of Ranking
Ranking of charge determines secured creditors’ priority/ranking to recover their

outstanding from the assets of a company, in case of liquidation or winding up
thereof. In the event of liquidation/winding-up of a company, though all the
secured creditors have a right to enforce their claims, however, the claims are
entertained in accordance with the ranking and there are chances that inferior
charge holders may not have any assets to enforce their claims.
c. Procedure to be followed
The procedures for the same is laid down vide Circular # PO-Law/Gen/141 dated
02/05/2002 hereunder:-
All security documents and Form 10 should distinctly specify ranking of MCB’s
charge. If prior charges exist over the assets of a customer, then NOC for creation
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of pari passu charge in favor of MCB shall be required. In such cases, reference
number and date of NOC for creation of pari passu charge should be given in the
letter of hypothecation, deed of floating charge or mortgage deed.
Prior to creation of charge, Search Report from office of SECP should invariably be
obtained. Search Report should clearly mention the ranking of existing charge(s)
created on the assets intended to be accepted by our Bank as security. This report
would help in ascertaining the total amount of charge / encumbrance created on
the assets and ranking of existing charge holders.
After registration of charge, final legal opinion on perfection and ranking of charge
should be held from bank’s Legal Affairs Division/ Legal Retainer. As per present
practice, for exposure greater than PKR 10.000 million legal opinions should be
sought from Legal Affairs.
d. Satisfaction of Bank’s registered charges with SECP in case of liquidation:
The amount for which the bank creates a registered charge at SECP is the secured
amount. Several banks may concurrently have charges registered against the
assets of a company. In this case, the charge holders may rank pari passu or may
hold ranking charges with varying priorities. In case of pari passu charge holders,
the proceeds of liquidation of a company will be shared in the ratio of the
outstanding of their respective secured amount to the aggregate outstanding
secured amounts of all the charge holders of the company in the same ranking.
Amount owed by a lender over and above a charge / pari passu charge registered
with the SECP, shall be an unsecured credit and will be satisfied after all the
secured creditors have been paid and all preferential payments to be made under
the Companies Ordinance 1984 i.e. employee wages etc. have been fulfilled.
5.2.10 Approval for issuance of NOCs
o Issuance of NOCs to be allowed at approval / review level of the limits

provided there is no dilution in security i.e. after issuance of NOC MCB
should not become inferior in respect of ranking of charge or margin.
o In cases where there is manifest evidence of dilution in security:
Review from at least one SCO will be required, or a higher review level
in case the subject proposal is processed by the Credit Review Dept.
Issuance of NOCs for all watchlisted and classified accounts not transferred to
SAMG to be allowed at the review level of GH RMG.
Maintenance of NOC issued/ received record
NOCs issued to and received from other financial institutions are treated as a
“Security” and accordingly a proper “Inward & Outward Register” shall be
maintained at Branches & CRCD (as the case may be) and copies of all such NOCs
shall be kept in safe custody along with other security / charge documents in the
concerned branches / CRCD. Formats of proposed Inward & Outward Folios are
attached as Appendix I to chapter 5.2.
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5.2.11 Release Of Charge / Letter of Satisfaction of Charge
Before replacement or change of security / security documents / partial release of

security, written approval is required from relevant Approval/ Review Authority.
Where property documents / security documents are released on full and final
adjustment of a limit, the Branch Manager (CBBG)/ Relationship Manager (WBG)
should satisfy himself that the property held is not a common security for any
other unadjusted limits with the branch or the branch has not issued any letter for
joint charge or have received a letter for joint charge from any of our other Branch
/ Bank. If documents are held with CRC relevant Branch Manager/ Relationship
Manager should confirm of above to CRCD for release of security.
In case exposure is secured against 100 % Cash Collateral
In case full/ partial release of cash collateral security on full/ partial adjustment of
limit, branch manager/ Relationship manager after satisfying that remaining
security (in case of partial release) will adequately cover finance along with margin
and also that the security held is not a common security for any other unadjusted
limits with the branch, can release cash collateral securities. Approval for
competent authority is not required in this regard. If cash collateral securities are
held with CRCD, request letter from branch manager will be required to CRCD
confirming above.
In case of replacement of security (cash collateral), approval from relevant

approval/ review authority (to be capped at relevant Business Group Head) shall be
obtained to this effect.
In terms of SBP BPD/RU-20/121-04(Policy)/7868/02 dated 24th May 2002, where

we are not in favor of creating further encumbrance on the assets held by them,
this should be communicated to the concerned bank/ NBFI / Customer within a
period of 15 working days.
Consumer auto financing and consumer auto leasing shall be exempted from the
above instructions in this section.
Full/partial release of security for non-performing loans (involving any remission

and/or rescheduling/restructuring shall be governed as per Section 4)
Documentation Check List Appendix IV to Chapter 5.1 (PART A)
5.2.12 Documentation under Consortium Finance
The term "syndicated lending/ Consortium Lending" refers to arrangements

whereby multiple lenders usually advance funds jointly to one/ single borrower
While the structure, pricing, repayment schedule and other terms of syndicated
loans can vary, the following common characteristics are usually present:
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a. Syndicated loans are normally governed by one set of documentation

describing the rights and obligations of the signatories - the borrower and all
the lenders (or syndicate members).
b. One or more lenders are mandated by the borrower to arrange credit

facilities on terms agreed between the arranger and the borrower.
c. The arranger may underwrite (i.e. undertake to provide) all or part of the
facility amount;
d. Typically, the total amount of a syndicated deal is relatively significant, even

though the credit extended by each participant does not generally exceed
what it would be prepared to lend on a bilateral basis;
e. The tenor may well be medium- or long-term, although short-term (under

one year) facilities are also common, particularly for trade-related
transactions;
f. Syndicated lending involves multiple parties e.g. arrangers, underwriters,

agents (facility and security), legal counsel (Transaction Lawyer) and
participating lenders.
g. Please refer to checklist Appendix IV to Chapter 5.1 PART A for completion of

security documentation in following two cases
i. Where MCB is Lead Manager/ Security Trustee

ii. Where MCB is not Lead Manager/ Security Trustee
5.2.13 Other Types of Borrowers and Documentation Requirements
a. Sole Proprietorship
A sole proprietorship is a business concern owned by a single person on his / her
own account with 100% control. There is no formal procedure to be followed in
setting up a sole proprietorship concern. However, it is necessary to establish that
the borrower is the sole owner of the business whose name is being used; and
therefore, a declaration evidencing the said position and the proprietor’s name etc.
should be obtained on the concern’s letterhead. Furthermore, such a concern may be
associated/registered with trade associations/bodies; and may have NTN number,
which should also be obtained, if applicable.
The account opening and lending documents stipulated by the Bank should be
signed by the sole proprietor and the Proprietorship stamp should be affixed.
Nevertheless, it must be ensured that the documents of all types (especially DP Note)
should be signed in such a manner that the name of the proprietor appears along
with the name of the proprietorship concern, since proprietorship isn’t a separate
entity.
b. Partnership/ Firm
Partnership is a business relationship entered into by a formal, written or oral
agreement between two or more persons carrying on a business in common. The
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capital of a partnership is provided by the partners who are liable jointly and
severally for the total debts/obligations of the firm; and share profit and loss of the
business according to the terms of the Partnership deed. In case Partnership deed in
unregistered, all partners of the firm should sign the Account Opening Form.
However, in case of registered partnership deed, partners may authorize any one or
more partners to do so (only if Partnership deed specifically allows the same).
While extending loans partnership deed should be carefully analyzed as to borrowing

clause, signing / documentation execution requirements or any restrictive clause
therein. The Loan documentation should preferably be got signed by all the partners.
However, they may authorize one or more partner to do so, as per the above
mentioned procedure. The firm stamp should be affixed on all the documents.
c. Other forms like Trusts, Societies, NGO’s, Clubs etc.

While extending loans to these bodies special care should be exercised. Charter of
incorporation, bye laws as well as proof of their registration should be carefully
examined before granting any facility. Clear legal opinion from bank’s Legal Affairs
Division should be obtained prior to extending finance, regarding borrowing powers
and charging of security and other requirements.
d. Government Bodies etc.

Officials negotiating on behalf of government should have necessary authority. The
lending documents should be signed by the Government officials authorized to sign
such documents and the document authorizing them to do so must be carefully
checked. Legal Clearance from banks legal Affairs Division should also be obtained.
5.2.14 List of Documents Required
Sr Account
Documents Required
# Nature
01 Individuals / 1. Attested photocopy of CNIC
Sole Proprietor 2. Trade body Association Letter/NTN, if applicable.(For Sole
ship proprietorship only)
3. Sole proprietorship declaration letter (A declaration to be
obtained from the proprietor on plain paper that he is the sole
proprietor of the firm and he undertakes to inform the bank of
any change in the business constitution).
02 Partnership/ 1. Attested photocopies of CNIC’s of all partners.
Firm 2. Attested copy of “Partnership Deed” duly signed by all partners
of the firm.
3. Attested copy of Registration Certificate with Registrar of
Firms. (In case partnership is registered)
03 Societies/ 1. Certified copy of Certificate of Registration.
NGO’s Clubs 2. Certified copy of Bye-laws/Rules & Regulations.
etc. 3. Resolution of the Governing Body/Executive Committee for
opening of account authorizing the person(s) to operate the
account and attested copy of the identity card of the authorized
person(s).
04 Trust 1. Attested copy of Certificate of Registration (Where applicable).
2. Attested copies of CNIC of all the trustees.
3. Certified copies of Instrument of Trust.
Documentation Check Appendix IV to Chapter 5.1 PART A
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5.2.15 Documentation Descriptions
The present mode of banking financing is structured on the pattern of Islamic

modes of financing, since interest based system of banking financing has been
banned in Pakistan, since 1982. The system started and developed as such under
guidelines and parameters of a Board constituted then by the Federal Government.
The Board not only developed basic structure of the system but also drafted
standard documentation in this context, including financing agreements. The said
standard documents/agreements are called IBs/IB Forms.
a. List of IB Forms Facility Wise
Following IB forms shall be obtained invariably for the facilities mentioned

hereunder:
1. All Fund based facilities

• IB – 6 or 6 K (Mark Up Agreement)
• IB – 12 (Demand Promissory Note)*
2. LC
• IB – 8 (LC application cum agreement)
3. FBP/ IBP/ FAFB

• IB – 9 (Letter of Buy-Back-cum-Indemnity)
• IB – 20 (Agreement for discounting/purchase of Bills)
4. FATR
• IB – 27 (Trust Receipt)
5. FIM
• IB – 6A1 (letter of indemnity for clearance of consignment)
6. BG
• IB-30 (Counter Guarantee)
7. Finance against Govt. Commodities

• IB-4
* = Waiver of DP note may be allowed on case to case basis, against due justification, keeping in
view the risk profile, track record and credit worthiness of the customer. Such requests for
waiver of legal and/ or security documentation formalities shall not be referred to LAD for
clarification/ opinion. These cases shall be elevated to the relevant competent authority as per
section 3.3.13 for decision. It will be at the discretion of the competent authority to refer these
cases to LAD if deemed appropriate.
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b. List of IB/ charge forms Security wise
Following IB forms/ charge forms/ documents shall be obtained invariably for the
facilities mentioned hereunder:
1. Hypothecation of Current Assets

• IB – 25A (Letter of Hypothecation)
2. Pledge of Stocks
• IB – 26 (letter of pledge)
• Letter of access
• Letter of disclaimer (if storage place belongs to third party)
3. Lien on marketable securities

• IB – 28 (Letter of Lien on Marketable Securities)
• IB – 31 (Agreement for Sale and Buy Back of marketable Securities)
• Letter of encashment
• IB 28A (in case of financing against third party shares to be obtained from owner of
shares (third party). IB 31 shall not be obtained from third party in this case)
4. Lien on Bank Account

• CF – 19 (Authorization for Ear marking)
5. Equitable mortgage
• IB – 24 (MODTD)
• Agreement to create registered mortgage
6. Registered Mortgage
• Registered mortgage deed
7. Personal Guarantee (IB-29)

• Where applicable/ required.
c. Description of Commonly used IBs
i. Agreement for Finance
Agreement for Financing or Mark-up Agreement is the basic and

fundamental document in Non Interest based financing system. It provides
basic terms and conditions of financing between the Bank and the
Customer. It provides the amount of finance and the mark-up thereupon;
and the terms and conditions for repayment thereof. It in fact establishes the
contract between the Bank and the Customer.
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ii. IB-6 (Agreement for Finance) is used for Short/Medium/Long Term

Financing on mark-up, other than Agricultural farming finance. IB-6A is
used in case of single transaction finance, other than Running Finance. IB-
6A is used as mark-up agreement for Demand Finance. IB-6C is used as
mark-up agreement for financing to fixed income persons. IB-6K is used
where mark-up is linked with KIBOR.
IB-6, in whatever form, is the most necessary document, without which the
bank's claim cannot be established. It must be obtained in case of all types
of financing (except Non Fund Based Financing). In addition, it must be
obtained on each renewal/enhancement.
iii. IB-8 (Application/Agreement for Issuance of LC) is an application written

by the customer and guaranteed by one guarantor, stating particulars of its
own, beneficiary, goods, amount, shipment, payment and voyage etc. The
application is in itself an agreement; and upon execution thereof by the
parties, it attains the status of a contract.
iv. IB-12 (D. P. Note) is a written commitment by the borrower that on demand
he/she shall pay to the bank certain sum of money. It should be obtained in
case of all financings. It is obtained for the Purchase Price. It must be
obtained on each renewal/enhancement of the facilities. However, in case of
a facility for a period of more than three years, a fresh DP Note should be
obtained before expiry of three years.
v. IB-20 (Agreement for Discount/Purchase of Bills) is an agreement

whereby the customer agree to (i) honor the bills on maturity (ii) indemnify
the bank in case of dis-honor of any Bill etc.
vi. IB-28 (Letter of Lien on Marketable Securities) is a letter by which the

customer or the owner (third party) agrees to pledge its marketable or other
securities e.g. Shares DSCs, SSCs etc. with the Bank. It must be signed by
pledger (owner of securities)
vii. IB-29 (Personal Guarantee) is an agreement/contract between the

guarantor/surety, the borrower and the Bank, whereby the
Guarantor/Surety undertakes to repay the outstanding liabilities of the
borrower, in case of his default, to the Bank. It may be given in person or in
a corporate capacity (by a company).
viii. IB-30 (Counter Guarantee) is obtained in the event of extending Bank

Guarantee facility to a customer, whereby it undertakes, amongst other
covenants, to pay any and all amounts which bank may be required to pay
under the BG to the beneficiary of the BG.
ix. IB-31 (Agreement for Sale & Buy Back of Marketable Securities) is
obtained in the event where collateral is in the form of marketable
securities, like shares. It also refers sale price and purchase price, on the
pattern of IB-6, for the reasons that the securities are treated to have been
purchased by the Bank and then sold back to the customer.
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d. Terminologies used in IB Forms
The principal segment of banking financing (Running/Cash/Demand Finance) is

based upon “Morabaha”, one of the Islamic modes of Financing. Morabaha is
basically a sale on credit. However, in banking financing terms, the Bank
purchases certain assets (raw material/stocks/machinery etc.) from the borrower
and pays the price thereof (“sale price”) to him, which is actually the amount of
finance; and then sells it to the borrower at a price (“purchase price”) which is to be
paid by the borrower after a certain period, along with mark-up/profit for the
period of finance.
Sale Price therefore, is actually the amount of finance i.e. principal amount of
finance; and purchase price is the amount financed to the borrower and the mark-
up thereupon.
i. Sale Price
Amount of the facility
ii. Purchase Price
The sale price + the maximum allowable mark-up according to the following
formula:
Principal × mark-up rate × (No of days of agreement )

365
Morabaha in its original terms provides that the purchase price may include an
amount of mark-up for some further period (cushion period), over and above the
period of finance, so that if the purchase isn’t paid on time, the lender may bring
the matter to the court of law during the said further period; and no financial loss
is caused to him for the said period. However, if the borrower pays the purchase
price in time, the amount of mark-up for the further period is reversed. It is called
rebate or prompt payment bonus. Presently, it is taken as difference of mark-up
calculated @ Standard Markup Rate (SMR) and Timely Payment Markup Rate
(TPMR).
e. Precautions in filling in IB Forms
i. Since sale price, purchase price and rebate are the main terms used in the
IBs, therefore, while getting executing IBs principal emphasis should be
upon the amounts relating to the said terms. Accordingly, the relevant
columns provided in the IBs for the said amounts should be filled in
appropriately.
ii. The date of execution and the reference of IB-6 (where applicable) should be
given therein.
iii. IB’s should be executed and witnessed appropriately. One witness should
be from borrower side and second witness should be from bank side. Copy
of CNIC of witness should also be kept
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iv. It must be ensured that the executants of the IBs are duly authorized to
execute the same, in case of companies and firms; and their constitutions
(MOA & AOA; and Partnership Deeds) allow execution of the documents.
v. Signatures of executants should be got verified with lead pencil by

authorized signatory (AS/ IBS holder)
vi. Provincial Governments levy stamp duty on agreements. It should be

ensured that proper stamp duty is paid as per requirement
vii. Every Page of IB forms should be got signed by the executant (s)
viii. There should be no cutting of text in IB forms, while executing IB forms

some customer delete standard clauses or alter the draft of IB forms. In
case of cutting of clause or any text in IB forms its approval should be
obtained from competent authority. All cuttings/ alterations must be duly
authenticated.
f. Use of Non Standard Documentation
Branches/ CRC should use standard formats of the bank. In case of

specialized transactions, where it is not possible to use standard formats.
Draft should be vetted from bank’s internal legal department prior to execution
of documents.
g. Inclusions of standard clauses
Following clauses should be present in all standard/ Non-standard

documentation
• Material Adverse Change Clause

• Majority Ownership Clause
• Cross Default Clause
Especially, in case of financing to Large Corporates/ Consortium Finance

it should be ensured that these clauses are covered in documentation.
h. Review of Standard Documents
Legal Affairs Division (LAD) will review all standard documentation / IB forms at
least once in a year and will circulate the necessary changes. Any change made by
legal department in standard documentation shall override the existing
documentation.
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5.3 Credit Risk Control and

Processes
5.3.1 Introduction
5.3.2 Service Level Agreement
5.3.3 CRCD Scope of Services
5.3.4 Responsibility Schedule
5.3.5 Process Flow
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5.3.1 Introduction
The presence of a strong and centralized credit risk control department is a key
element to ensure proper credit discipline in the Bank. In order to achieve this
objective, the Bank has established the Credit Risk Control Division (CRCD)
independent of business units.
Credit Risk Control (CRC) is essentially a back office activity that supports the
extension and monitoring of credit by the business units. This support allows the
business units (CBBG/ WBG/ IBG) to focus on their marketing goals while
operating within the covenants, conditions & requirements of credit approval.
CRCD is independent of the business groups and has been structured as a part of
the Risk Management Group. The relationship / branch remains the focal point of
contact with the client / borrower and, therefore, CRCD’s direct contact is only
with the business / operations side that in turn interact with the borrower on
documentation / monitoring matters.
MCB is a large commercial bank with a wide a network of branches. Accordingly,

there is a need to balance the scale of CRC coverage against the cost of such
support. Presence of a CRC support person in every branch is not desirable owing
to the following:
High cost involved

Inefficient utilization of resources
Logistical problem of controlling off-site staff
Non availability of adequate trained human resource
The alternative is to centralize this function on a regional basis and gradually

increase its coverage and reach. The hubs thus created assist the regions central
CRC structure. The hub is an exact replica of a regions central CRC arrangement
that supports a local cluster of branches. And provide all support provided by the
regional CRC center. The collateral / security documentation of the branches
covered by a hub are stored in the hubs vault and are not transferred to the main
regional CRC vault for ease of logistics.
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For branches where CRCD cover is not available, the responsibility for providing
credit risk control services will be with the relevant Business Group. All
responsibilities as per Appendix I to Chapter 5.3 will be performed by the business
units.
5.3.2 Service Level Agreement
In order to document the roles and responsibilities of CRCD and branches (under
CRC coverage) Service Level Agreements (SLA) have been executed between CRCD
and the business groups that define the working relationship between the branches
and the CRCD in terms of services and the parameters that govern the rendering of
these services by CRCD to the internal clients (i.e. the branches & the business
side). Turn-around-time (TAT), cut-off-time, list of support activities and
responsibility are the major articles that are listed in the SLA. The range of services
& support is to be evaluated in terms of SLAs only.
The SLA may be reviewed (wholly or partially) with the mutual consent of the
stakeholders on need basis. The purpose of this exercise is to review the contents of
the SLA with regards to observations (if any) of CRCD and the business groups.
In the future if and when CRCD takes over following role, separate SLA’s will be
executed
1. With HR for Employee Loans

2. With Agricultural Division for Agricultural Financing
3. With Transaction Banking Division for vendor Management
4. With Consumer Banking Group for Consumer Financing.
5.3.3 CRCD Scope of Services
Credit Disbursement Control
The Credit Risk Control function is responsible for issuance of Disbursement

Authorization Certificate (DAC). The DAC is issued after CRC is satisfied that the
following have been ensured:
The loan application has proper approval from competent authority

Documentation is complete as per approval of finance and receipt of collateral
holding
All covenants, terms & conditions have been / are complied with.
In case of any exceptions (to bank’s policy, rules, procedures, etc.) necessary
approval should be held as per bank policy or a waiver is obtained for the same.
Furthermore, the email instructions for implementation/ disbursement of credit

lines from CRCD are also considered equivalent to the DAC (Disbursement
Authorization Certificate). The instructions shall be issued by designated persons
(within CRC) only.
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In automated (Symbol) branches where system can be accessed centrally, CRCD

will feed limit particulars and initial markup rates. This will be effective after
approval from Group Head RMG and once IT provides support for central access to
the branch system. This action of limit feeding in Symbols for a particular
borrowing account will constitute issuance of a DAC to the branch.
For non-symbol branches (where central access to branch system is not available
to CRC), the branch operations will feed limits after receipt of a DAC issued by
CRCD.
Credit Documentation
Documentation is an essential part of the credit process and is required for each
phase of the credit cycle. It establishes the relationship between the bank and the
borrower and forms the basis for any legal action in the event of a default. It is the
responsibility of CRCD to ensure completeness of documentation in accordance
with approved terms and conditions. Outstanding documents should be tracked
and followed up with business to ensure execution and receipt.
Credit Monitoring and Administration
After the facility is approved and draw down allowed, the facility is to be
continuously monitored. The monitoring aspect includes tracking borrower’s
compliance with credit terms, repayments, identifying early signs of irregularity in
exception reports and ensuring that periodic valuation of collateral is being
conducted.
It is the responsibility of CRCD to maintain a system to ensure effective monitoring

of above mentioned requirements. Tickler system capable of generating advance
alerts should also be developed for all its functional responsibilities. However,
monitoring of Watchlisted/ Classified accounts will not be the responsibility of
CRC.
Maintenance of Collaterals / Security Documents
Collateral documentation, such as mortgage papers and title documents, are assets
of the Bank, which if lost or fraudulently given to other lenders may cause loss to
the Bank.
CRCD will keep all security documentation in Security Documentation Folder (as
per Appendix II to Chapter 5.3) in a room with fire proof/ resistant arrangements
under dual control after lodgment in Safe Custody Register (SB-21). A separate
register will also be maintained to keep track of movement of any document /
document folder. CRCD will issue collateral lodgment receipt to the concerned
branch which will serve as a proof that documents are held with CRCD in safe
custody.
On receipt, collateral should be entered in register and placed in a clearly marked

folder / pouch for accurate identification and ready retrieval.
Profit payment on security held as collateral will be responsibility of business units
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Access to collateral should be by dual authorization. Receipt and release of

collateral should require authorization from at least two authorized officers of the
Bank.
At all times, security documentation should be available for physical checking by

internal and external audit.
Under no circumstances a security document, an insurance folder or any contents

of the same are to be removed from the CRCD Area. These documents should NOT
be kept outside the vault area for an overnight period. Exceptions to the above rule
need to be properly approved by Regional Head CRCD or the Hub Incharge.
Authorization and outward movement of any such documentation should be noted
in the “Document Movement Register”. In cases where an outward movement, of
any such security document, from the custodial area to another CRCD area is
required then this too should be noted in the “Document Movement Register” in its
“Internal CRCD Movement” portion.
When such a document is required by a branch then the request for its temporary
release / transfer should come from the branch to CRCD such a request should
clearly specify the purpose & time of temporary movement, needs to be duly
approved by the Regional Manager (CBBG) or Unit Head (WBG). After CRCD
authorization process, as detailed above, the branch’s authorized representative
will take custody of the required document at the CRCD premises.
When files / documents are authorized to be removed temporarily outside CRCD’s

custodial area, the responsibility of these files / documents also shift to the
concerned Unit Head CRCD or to the Branch Manager or to the Unit Head (WBG)
who has taken over temporary custody.
When the branch is taken over by CRCD, it will be the responsibility of CRCD to
receive all security / title documents relating to finance account (as per list given
under Part-XI (2) of Responsibility Schedule Appendix I to Chapter 5.3). CRCD will
scan all these documents and a soft copy will be provided to respective branch for
their use or any reference to such documents.
Branches not taken over by CRCD
In branches where CRCD is not functional, it will be responsibility of Branch

Manager to ensure that security documentation is placed in Security
Documentation Folder (As per Appendix II to Chapter 5.3) in room with fire proof/
resistant arrangements under dual control after lodgment in Safe Custody Register
(SB-21). A separate register will also be maintained to keep track of movement of
any document / document folder.
On receipt, collateral should be entered in register and placed in a clearly marked

folder/pouch for accurate identification and ready retrieval. Access to collateral
should be by dual authorization. Receipt and release of collateral should require
authorization of by least two responsible officers. At all times security
documentation should be available for physical checking by internal and external
audit.
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Under no circumstances the documentation, insurance folders and their contents

should be removed from the Credit Documentation area. Exceptions need to be
properly approved by Branch Manager and the outward movement of any such
documentation should be noted in the Checkout Card. When outside the Credit
Documentation Area, the responsibility of the files shifts to the Branch Manager.
Collateral registers should be checked against physical holdings at least annually

by the following:
1. Branch Manager (at the time of annual review)

2. Regional Manager (once during a calendar year)
5.3.4 Responsibility Schedule
Please refer Appendix I to Chapter 5.3 for responsibility schedule between CRCD
and Business Units (WBG/ CBBG)
5.3.5 Process Flows
Process flows of CRCD are present in SLA’s for reference and are subject to changes
on a need basis with mutual consent.
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5.4 Insurance
5.4.1 Introduction
5.4.2 Approved Panel of Insurance Companies
5.4.3 Per Risk Limit Methodology
5.4.4 Review of Insurance Policy
5.4.5 Insurance Grid
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Introduction
All assets charged to the bank are to be insured during the complete tenor of
outstanding liabilities. Accordingly, all assets under Bank’s lien are to be insured by
an insurance company on the Banks approved panel. In case of equitable charge /
mortgage on fixed assets, value of land shall be excluded to calculate the amount of
which insurance is required. Business Units shall propose the same in credit
proposal and same shall be made part of Approval of Finance.
5.4.1 Approved panel of Insurance Companies
FIID will notify the list of insurance companies on MCBs approved panel on an
annual basis. The annual review process would evaluate the financial condition
and performance of each insurance company and a recommendation for continued
inclusion would be elevated to MCC for approval, through CRMD.
The process for inclusion of an insurance company on MCBs panel would be as

follows:
• An insurance company desirous of inclusion in the MCB panel of insurance

companies would submit a formal application to FIID along with all relevant
documents.
• FIID would review the information and documents (SECP certificates, IAP
directives etc.) received from the insurance company and can request
additional information, if required.
• FIID would evaluate the financial condition of the applicant, review treaty
arrangements, sponsor strength and the claim paying capacity of the
applicant and would forward its recommendation (per risk limits) for
inclusion or otherwise to CRMD.
• CRMD would elevate the proposal to MCC for final decision.
5.4.2 Per Risk Limit Methodology
Previously, a ‘per party limit’ was assigned to each insurance company on MCB’s
panel and the same limit was construed to be applicable to each category of risk e.g.
fire, marine, vehicle, etc. This led to frequent requests for waiver as the risk
underwriting capacity of various insurance companies was different for each risk
category.
In order to rationalize the insurance exposure limit setting process, a ‘per risk limit’
methodology has been put in place. The following methodology has been adopted for
determining the risk limits for insurance companies:
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1) A credit scoring model giving due weight to capitalization, management

competence and financial performance is used to score the insurance
companies.
2) It will be the discretion of CRMD to determine weights for different factors in

credit scoring model after getting agreement with FIID. In case of any
difference, subject will be referred to GH RMG for final decision.
3) The credit score (as a percentage) is then applied to the risk-wise treaty
capacity for each insurance company to determine the pre risk limits for each
specific insurance company.
The methodology is applied consistently across the insurance companies other than
for National Insurance Company where a subjective limit is proposed based on the
state owned nature of the entity.
This methodology is used to determine the ‘per risk limits’ for the universe of
insurance companies on annual basis and the list is disseminated by FIID following
approval. It will be the responsibility of FIID to monitor annual limit expiries of
insurance companies.
Unlisted insurance companies are recommended for participation as co-insurers

only in the lead policies issued by MCB approved panel of insurers. Accordingly, the
unlisted insurance companies would not be able to book business with MCB as lead
insurers and would participate as syndicate partners to the extent of their respective
approved limits.
Exception approvals are to be allowed as follows:
a) In case sum insured exceeds the Per Risk Limit but is within the Treaty
Capacity of the insurer, the waiver shall be approved by Group Head RMG on
the recommendation of the relevant Business Group Head.
b) If cover is required from an insurance company not on MCB panel, approval

from the President shall be required for the same. Request to carry
recommendation of the relevant Group Head and GH RMG.
c) GH RMG would be authorized to allow an un-listed insurance company to

underwrite business in a lead capacity on the request of the relevant Group
Head. The co-insurance limit of such insurer to be blocked for the duration of
such approval.
Waiver requests should be processed and approved prior to disbursement of

facilities / opening of L/Cs. All such requests should be routed through FIID and
approvals shall be held on record by FIID.
5.4.4 Review of Insurance Policy

Following receipt of the Insurance policy, the same is required to be reviewed with
special emphasis on the following points:
• MCB’s name as mortgagee or loss payee
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• Expiry date of insurance policy

• Description and location of insured property (stocks, plant & machinery,
building, etc.) is same as mentioned in Credit Approval.
• Risks as mentioned in Approval are covered or in case Approval is silent
about risks coverage, all applicable risks (fire, theft & burglary, malicious
damage, riot, strike, etc.) are covered.
• Full premium paid receipt/ or certificate of premium payment in original or
attested photocopy is available.
• Value of insurance is adequate to cover MCB’s exposure.
• Adhesive stamps of required value are affixed on the face of original
insurance policy.
• Amount insured by insurance company (ies) is within the approved per risk
limits.
• In case of co-insurance, share of each insurance company is authenticated
by co-insurers.
Additionally, the following are summarized for guidance and meticulous

compliance:-
1- It is in the interest of the Bank as well as clients that adequate insurance cover is
obtained for industries financed by MCB as well as for finance facilities extended to
our clients against machinery / stocks and hypothecation / pledge of goods.
It should be ensured that advances do not remain unsecured for lack of adequate
insurance cover and a proper policy of insurance is obtained. This fact should also
be reported in the proposals for renewal/enhancement of existing facilities and/or
for grant of fresh finances mentioning therein validity date/risk covered/amount of
insurance obtained.
2- It should be ensured that stocks/machineries providing cover to our facilities

must always be adequately covered, i.e. insurance must always provide cover to the
required stocks/assets declared from time to time for coverage/value not less than
outstanding loan or exposure / operative limit whichever is higher plus 10%.
3- It may be suggested to customer to get insurance cover for remaining

stocks/assets also, so that in case of any mishap their loss may be minimized.
Where customers do not get the remaining assets/stocks insured, an undertaking
should be obtained from customers, to the effect, that insurance claim received shall
be first available towards adjustment of Bank’s financing and balance if any shall be
repaid / paid from their own sources. In case where goods under bank’s lien have to
be transported, the transit risk coverage should also be obtained.
4- Insurance coverage should be obtained for all risks pertinent to the assets being
insured and keeping in view area / storage conditions where goods are stored.
5- Open Pledge: Some limits allowed against Phutti, Cotton, Rice, Paddy, Sugar and
like stocks are under open pledge arrangement, exposing the Bank to high risks for
Burglary, Fire, Riot, Strike, Damage/Malicious damage etc. As such, it is necessary
that appropriate insurance policy is obtained keeping in view the fact that goods are
kept under open pledge. The policy / policy cover note should clearly mention that
the insurance stocks/assets are stored in open and there should be no restrictive
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clause regarding such storage arrangement to avoid any dispute in the event of a
claim.
6- Legal Cases: Regarding insurance cover on non-performing assets for which

Bank has filed recovery suit(s), insurance cost can be debited to outstanding
balances only after seeking permission from the Competent Court by filing an
urgent application through our counsel to this effect because the matter is sub-
judice. It is, therefore, recommended to consult the counsel, contesting the case on
Bank’s behalf, well in time to seek court’s permission in this respect.
7- The branches should invariably obtain insurance cover note in original and
examine the same vis-à-vis appropriateness of the risks covered, with Bank Clause,
before allowing any disbursement/taking any exposure on such assets under our
lien. Please note that no risk extension is covered unless premium for the
extension(s) is/are received by the insurance company. They should diarize the
validity date of Insurance Cover Note and ensure that Premium Payment Receipt in
original / Policy are received before the expiry of validity of the cover note. During
currency of cover note if any claim is lodged, the insurance company is only liable to
pay claim only after receipt of premium.
8- In case of insurance of building, insurance cover is available for value above

plinth level and as such insurance coverage for fixed property under our lien may be
obtained after deducting value of land and below plinth civil works etc., for which
necessary assistance of bank’s approved valuer, may be obtained. Value of land
shall be excluded to calculate the amount of which insurance is required. Business
Units shall propose the same in credit proposal and same shall be made part of
Approval of Finance.
9- Normally Insurance policies expire at 4 O’clock in the afternoon of the policy

expiry date and as such branches should hold the documents confirming renewal of
policy before the aforesaid time. However, as a matter of rule, branches are advised
to obtain renewal of the policy at least one week before its expiry and should diarize
the same. Where Night-work is applicable, the matter be referred to insurance
companies for coverage &/or exclusion of Night-work clause from warranties.
10- In case the insured stocks/assets are stored in open or open sided
building/sheds or where there is/are deviation(s) from policy or warranty conditions
are not fulfilled, the policy/policy cover note should clearly mention the same and
there should not be restrictive clause regarding such storage arrangement, to avoid
any dispute in the event of any claim. Branches should ensure that clause
excluding the storage as above is deleted or varied by the insurance company and
duly authenticated bearing signature & seal.
11- Insurance coverage to be obtained should not only be limited to above

guidelines, but be based on specific ground reality. To further facilitate
understanding of branches/field offices on the subject, Appendix I to Chapter 5.4
provides details of perils for which insurance cover (other than marine insurance)
are generally available for stocks/assets under banks lien and the risks usually not
covered in a standard policy. However, branches are advised to study the specific
original policy / policy cover note and ensure that all pertinent risk for which cover
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is available & required has been obtained/relevant exclusion have been deleted and
duly stamped by the insurer.
12- In case of financing, where during Banks exposure (fund based &/or non-fund)
transportation by sea vessel is involved, appropriate marine insurance cover shall be
obtained in all cases as per guidelines provided in User Manual of Trade Service
Centres.
5.4.5 Insurance Grid
Branches/ offices are advised to ensure coverage of all pertinent risks associated
with the asset held under security. In order to provide guidance an Insurance Grid
(insurance risk coverage on assets held as security) is being introduced (Appendix
II to Chapter 5.4). The Insurance Grid identifies the risk coverage to be obtained for
various assets commonly held as security by the bank and this should not be
considered as exhaustive requirement. Actual decision on risk coverage should be
taken by relevant approval/review authority keeping in view nature, location and
storage conditions of the asset held as security.
For Current Assets and fixed assets (Plant & Machinery and Building) charged to
the bank, insurance cover should invariably be obtained against the following risks:
1. Fire
2. Riots & Strikes
3. Malicious Damages
4. Burglary (shall not be required for mortgaged properties)
GH RMG shall be authorized to allow waiver of above mentioned mandatory risks

(for both current and fixed assets).
Waiver of all other risks (for current and fixed assets) may be allowed at original
approval/review level. Request for waiver of all other risks (other than the
mandatory risks mentioned above) falling in approval levels beyond relevant
Business Group Head, shall be approved by relevant Business Group Head level
keeping in view nature, location and storage conditions of the asset held as
security. Proper justification must be recorded and should be held on record for
allowing waiver of insurance risk coverage. Relevant Business Group Head may
delegate this authority at Business Head level if deemed appropriate.
It should be ensured that formal request for waiver of insurance cover of

mandatory and/or non-mandatory risks for both current and fixed assets, if any, is
elevated as part of the Credit Proposal. Otherwise confirmation by the field should
be incorporated in the CP that insurance shall be arranged in line with the
Insurance Grid and no waiver is required.
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5.5 Deferral Policy
5.5.1 Introduction
5.5.2 Documentation Categories
5.5.3 Deferral Approval Authority
5.5.4 Deferral Requests
5.5.5 Compliance Responsibility
5.5.6 Reporting
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DEFERRAL POLICY
5.5.1 Introduction
It is MCB’s policy to allow disbursement of approved credit facilities after perfection

of the required security/support documentation. Therefore, deferral of credit
documents will generally be discouraged. There may however be genuine situations
where deferral of credit documents may be considered for disbursal of approved
credit facilities.
The following guidelines should be observed for allowing deferrals:
1. The customer has proven positive track record.
2. The bank is not exposed to a pecuniary risk on account of the
proposed deferral.
3. Completion of deferred documentation is certain.
4. The deferral does not violate any of the regulatory requirements.
5. The deferral does not jeopardize the rights and remedies available to
the bank.
It will be responsibility of business units to complete documentation within deferral
time allowed.
5.5.2 Documentation Categories
Normally there are three (3) categories of documents that are required to be
obtained from the customer
1. Documents providing evidence to legal claim
For example
y Board Resolution
y Markup/ Finance Agreements (IB 06, 6A, 6B, 6C, STFA etc.)
y Documents creating security interest like hypothecation/
pledge agreements, bill discounting agreements, Memorandum
of Deposit of title deeds (MODTD), SBLC, Bank Guarantee etc.
As a policy, all such documents that provide evidence to legal claim are not
deferrable.
2. Documents required by regulatory bodies
All documents that are required to be obtained as per instructions

issued by SBP/ any other regulatory body are not deferrable.
3. Support documents
Documents that do not provide evidence to legal claim and are

obtained to further strengthen security interest or to monitor
performance of the borrower are deferrable under guidelines
mentioned above. Please refer to Appendix I to Chapter 5.5 for
deferrable documents.
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5.5.3 Deferral Approval Authority
Following approval matrix shall apply to allow deferrals:

Deferral Deferral Approval Authority Maximum Tenor of Deferral
status from Deferral Approval Date
In-House In-house deferral (for CBBG clients only)
Deferral for can be availed once i.e. either at General
CBBG Manager or Business Head level, as per
the requirement. Subsequent deferral
shall be allowed as per following levels
Concerned Business Group Head i.e.

1st (GH CBBG / GH WBG/ Head Islamic
Banking)
As described in Appendix I to
Chapter 5.5
For Approvals below level of GH
CBBG/WBG, relevant Group Head can
allow 2nd Deferral.
2nd
For Approval/ Review level of GH-CBBG/
WBG & above, SCO 1 can allow 2nd
Deferral.
SCO 2
(Irrespective of Credit Approval authority
3rd
Level)
• Commercial Branch Banking Group (CBBG) shall have the option of obtaining
in-house deferrals for their clients, details as per Appendix I to Chapter 5.5.
• CBBG Branches can avail only one of the in-house deferrals i.e. either from
General Manager or Business Head. Branch Manager should identify the time
required to rectify the discrepancy and in-house deferral should be obtained
from GM or Business Head accordingly. Any further deferral shall be approved
as per the above approval matrix (i.e. 1st, 2nd and 3rd deferral).
y If documentation is not perfected within the time-frame conveyed for 1st

deferral, field may elevate request for 2nd and/or 3rd deferral providing adequate
justifications in this regard.
y Maximum time for 2nd and 3rd deferral would be same as specified on a
document-wise basis in Appendix I to Chapter 5.5.
y Upon expiry of 3rd deferral, any deficiency in deferred documents will result
automatic limit freezing and no further deferral shall be allowed. Only in
exceptional cases depending upon nature of case GH RMG may allow further
deferral.
y While allowing such deferrals, sanctioning authority must be satisfied that,
a. Deferred Documents do not fall under document categories 1 and 2.
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307
b. Deferral will not expose bank to any pecuniary risk and bank’s
security position is not weakened
c. Personal Guarantees are not included in document category 3 and a
deferral of the same would require GH RMG approval.
y In case of any other support document not specifically included in the list
(Appendix I to Chapter 5.5) and business considers that there is a genuine
requirement to defer the document. They can seek approval from Deferral
approval authority as per matrix given above.
At the time of take-over of a branch by CRCD, a 60-day grace period

(starting from the date of UER provided to the concerned Branch) for
rectification of all documentation related discrepancies would be provided to
the concerned branch. After lapse of 60-days blanket period, relevant Group
Head shall be authorized to allow further 60-days deferral for rectification of
discrepancies. This 60-days period for extension in deferral shall commence
from the date of expiry of blanket (60-days) deferral allowed at the time of
takeover of Branches. However, customer’s lines shall remain blocked until
relevant Group Head approval is obtained and conveyed to CRCD.
Branches shall elevate requests to relevant Group Head for extension in deferral
period, if required so, well before expiry of blanket deferral allowed at the time
of takeover of Branches by CRCD. After completion of this period (60 + 60
days), any further relaxation would only be given through defined process of
obtaining a deferral/waiver as per policy. In absence of deferral from competent
authority, CRCD will freeze lines and no further disbursal will be allowed.
5.5.4 Deferral Requests
Relationship Managers/ branches may use the attached format (Appendix II to

Chapter 5.5) for obtaining deferral of any document. Proper reasons for deferral
requirement should be provided with the request. In case request is forwarded
electronically, they should incorporate all relevant information.
The deferral approval will be forwarded to CRCD which would allow disbursement
after confirming that all documentation including any required deferrals is in place.
5.5.5 Compliance Responsibility
Compliance to the policy would be the collective responsibility of the business units
and their respective Group Heads.
5.5.6 Reporting
CRCD will maintain record of deferrals allowed and will also be responsible for
reporting the same at different management levels. CRCD will develop formats
keeping in view reporting requirements at different management levels. The
branches shall assume responsibility for reporting and issuance of the DAC and
other CRCD functions, wherever CRCD services are not available
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5.6 Vendor Management

5.6.1 Introduction to Vendor Management
5.6.2 Role of Credit Risk Control in Enlistment /
De-listment
5.6.3 Valuation of Fixed Assets Under Bank’s
Lien and Valuers
5.6.4 Muccadumage Operations and Muccadums
5.6.4.1 Appointment of Muccadum & Payment

5.6.4.2 Disbursement against Pledge of Stocks
5.6.4.3 Issuance of Delivery Order
5.6.4.4 Evaluation and Delinquency Reporting
5.6.5 C&F Agents and Clearing of Imported

Goods
5.6.5.1 Appointment of C&F Agent

5.6.5.2 Mechanics of Clearance of Goods
5.6.5.3 Clearance of Goods in Bonded
Warehouse
5.6.5.4 One-off Transactions
5.6.5.5 Clearance Documents Handling
Commission
5.6.6 Tank Terminals & Handling Stock of Liquid

Cargo
5.6.6.1 Service Mechanism

5.6.6.2 Precautions
5.6.6.3 Reporting
5.6.7 Vendors Providing Services of Credit

Reports, Search Reports and Legal Services
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5.6.1 Introduction to Vendor Management1
Outsourcing is a cost effective alternative for the bank for activities that do not
constitute mainstream banking. However, outsourcing can amplify the risk profile
of a bank by exposing it to strategic, reputation, compliance and operational risks
arising from failure of a vendor in providing the service, breaches in security, or
inability to comply with legal and regulatory requirements. The bank also needs to
manage associated concentration risk that may cause lack of control over a service
provider who renders many services for the bank, or Bank is excessively dependent
on a vendor for a specific service or due to dominant position in a specific region
etc. Management of concentration risk will be the responsibility of business units.
In order to mitigate these risks, risk management techniques have been developed
for proper identification, assessment and mitigation of third-party risks.
Key factors involved in Risk Management Process
• Establishing senior management awareness of the risks associated with

outsourcing agreements in order to ensure effective risk management
practices;
• Ensuring that an outsourcing arrangement is prudent from a risk
perspective and consistent with the business objectives of the institution;
• Systematically assessing needs while establishing risk-based requirements;
• Implementing effective controls to address identified risks;
• Performing ongoing monitoring to identify and evaluate changes in
associated risks.
• Documenting procedures, roles/ responsibilities, reporting mechanisms, and
responsibility segregation among different departments of the bank
Typically, this process incorporates the following activities:
• Risk assessment and its requirements;

• Due diligence in selecting a third-party service provider;
• Adopting qualitative & quantitative criterion for enlistment and allocation of
limit;
• Contract negotiation and implementation; and
• Ongoing monitoring.
5.6.2 Role of Credit Risk Control in Enlistment and De-listment
Credit Risk Control Division will perform following functions pertaining to all credit
related vendors:
• Processing and recommending vendor’s applications for enlistment of credit

related Vendors;
• Monitoring and Oversight;
1
Scope of the chapter includes only credit related vendors i.e. Valuers, Muccadums, C&F agents etc.
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• Issuing Warnings and processing for de-listment, if vendors does not

perform up to the mark;
Above functions will be performed by a Vendor Management Unit in CRCD. In this

section CRC unit responsible for vendor management is referred as VMU of CRCD
Branches / Relationship Managers will contact VMU of CRCD for reporting of all
material anomalies regarding third-party service providers relating to Credits.
Relationship between business units and CRCD is governed by Service Level

Agreement (SLA); therefore, any change in SLA will result in amendment in
processes defined in this chapter.
5.6.3 VALUATION OF FIXED ASSETS UNDER BANK’S LIEN AND VALUERS
Professional Valuers are individuals or organizations that appraise the value of

assets and collateral provided to Banks and Financial Institutions for the purpose
of securing loans, advances and any other facility.
Section 5(m) of BCO 1962 states, ‘Secured Loans and Advances means a loan or
advance made on the security of assets, the market value of which is not at any
time less than the amount of such loan’. Accordingly, the market value is required
to be used as the basis for valuation of assets offered as security at the time of
extension of credit.
Keeping in view best practices a reasonable margin should also be held to cover
price fluctuations. Margin requirements are set in Chapter 5.1.
Guidelines for Arranging Valuations of Assets:
The valuation of assets will be arranged as under:
a. CRC will arrange valuation of assets held as security in cases where existing /
proposed limit size is above PKR 1.000M (both fund based and non-fund
based).
b. Branches shall arrange valuations in cases where existing / proposed limit size
is up to PKR 1.000M (both fund based and non-fund based). However, in case
of Branches taken over by CRC, valuations will be arranged by CRC,
(irrespective of the exposure) and Branches shall not be authorized to arrange
valuations.
A- Valuation of assets where existing / proposed limit size is above PKR 1.000M
(and for Branches taken over by CRC):
Branch Manager / Relationship Manager shall request VMU, CRC (Lahore or

any CRC sub office nominated by VMU-CRC Lahore) in writing (through memo
or email) and provide necessary information for arranging valuation of the
security.
VMU-CRC (Lahore or any CRC sub office nominated by VMU-CRC Lahore) shall
assign the valuation directly to a valuer from bank’s approved panel.
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The valuer will submit the valuation report directly to VMU, CRC (Lahore or
any CRC sub office nominated by VMU-CRC Lahore).
For Branches taken over by CRCD, original valuation report shall remain with
CRC and copy will be provided to Business Unit.
Payment to valuer shall be made through CRC.
CRC shall assign the valuation jobs after considering following,
a. Concentrations to be avoided.
b. Technical expertise of the Valuer to be kept in view.
c. Fair distribution of business among all Valuers
B- Valuation of assets where existing / proposed limit size is up to PKR 1.000M

(and for Branches not taken over by CRC):
Branch Manager / Relationship Manager shall select / appoint a valuer for
valuation of the security.
The valuer will submit the valuation report directly to the Branch.
Valuation fee will be paid to the valuer after receipt of the valuation report.
In case of new customer, payment of the valuation fee shall be recovered
upfront at the time of assigning valuation of assets to the valuer.
Payment shall be made through Branch.
Below are the Process flow sheets to arrange Valuations.
(1) Valuation of Assets arranged by VMU-CRC:
Valuation of Assets
Approved
Valuer
Payment of
Prepare Valuation
Conduct Valuation Fee
Report
Valuation Received
Business Unit
Request for Payment arrangements as per

Valuation Copy of Valuation
VMU-CRC Instructions
Report to branch
Bill Amount as per approved rates

VMU -CRC ( Lahore or any CRC sub
Payment arrangment Payment arrangment

office nominated by CRC- Lahore)
Receive Valuation
Report along with BIll
Select Valuer & Prepare Appointment Letter
CRC Lodgment
Database in Safe
update Custody
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(2) Valuation of assets arranged by Branches:

Approved
Valuer
Business Unit
Safe Custody of Branch
Important guidelines to arrange valuations are as under,
i. All valuation reports must be received directly from the Valuer in sealed
envelopes. CRC officials/Branches will not accept the reports, if these are
not addressed to MCB.
ii. CRC officials / Branch Managers will ensure that valuation report
discloses basis and justification for values assigned by the valuer and it
is supported with minimum required information.
iii. Valuations of tangible property and fixed assets should be updated at

least after every three years unless,
a. Branch Manager/ Relationship Manager on the basis of site visit

concludes in writing that the valuation still holds true or present
value is higher than assessed value. AND
b. Obtains its approval from the sanctioning authority.
iv. CRC officials/ Business units will not merely rely on valuation amount
determined by the Valuer, but a Certificate from Branch
Manager/Relationship Officer certifying that the property offered for
security was personally inspected by him/ her and Valuer’s report
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313
regarding the value of property and the basis of prevailing cost / rate
assumed are correct in his/ her opinion.
This requirement shall apply in case of Residential, Commercial & Semi-

Commercial properties and will not be applicable in case of industrial
plant, machinery etc.
In case Branch Manager/Relationship officer differs from the valuation

done by the Valuer, he/ she would give his own downgraded assessment
in the certificate.
v. Valuation charges must be negotiated/ paid as per approved fee grid and
direct payment by the customers shall not be allowed. All payments
would be made by Branch / VMU-CRC to the Valuer.
vi. Valuation reports of fixed assets should be jointly signed by Lead

Surveyors along with Supervising Team members. Lead Surveyors shall
also specify their Pakistan Engineering Council (PEC) number or
Pakistan Council of Architects and Town Planners (PCATP) number, or
Control number allocated by Pakistan Banks’ Association.
vii. In case of syndicated financing where MCB is not the arranger, valuation
reports of Valuers which are not enlisted with MCB will be acceptable, if
Valuer is enlisted with PBA.
viii. Advance against commercial building or building let out on rental/ good-
will basis will be discouraged. If however, it becomes absolutely
necessary to accept such properties as security,
a. The value of the property should be taken at Forced Sale Value

(FSV) instead of Market Value. The minimum margin requirement
on FSV is 30%;
b. If forced sale value of property cannot be determined accurately then
such property should be valued at 25% of Market Value evaluated
by Bank’s approved Architects/ Engineers/ Surveyors (in this
scenario no further margin will be applied if value is taken at 25%);
c. Approval authorities may place higher margin restriction keeping in
view the location of property and risk profile of the customer;
d. Commercial buildings or buildings let out on rental/good-will shall
only be accepted as security after obtaining legal clearance on title
and mortgage documentation.
ix. While accepting argi land as collateral, value of the property shall be
taken at market value. The minimum margin requirement on FSV shall
be 50% or 20% of PIU, whichever is higher.
Valuation of Classified Advances
Valuation of the accounts transferred to SAMG shall be arranged by SAMG at their

end from the list of Valuers approved on the panel of MCB Bank ltd. Valuation
reports in write off cases should not be more than 12 months old from the date of
elevation of remission proposal.
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Forced Sale Valuation (FSV) shall be undertaken as per guidelines/terms of

reference2, and shall also be in line with the requirement of Prudential Regulation
# R-8/Audit/SBP. Before arranging valuations, SAMG will obtain Valuer’s
acceptance for above mentioned terms of reference.
SAMG units will arrange FSV (Both full scope and desktop valuation) of only those
classified assets which are under Bank’s exclusive or 1st charge under
registered/equitable mortgage and have control in case of pledged assets,
supported with perfect documentation. Otherwise approval from Group Head SAMG
will be required before arranging FSV.
This will be the responsibility of Business units to conduct Desktop Valuations for
both the cases where FSV benefit is to be taken as well as for collaterals against
regular exposures so as to ensure compliance with the qualitative criteria of
collaterals under the FIRB Approach where the bank will be transitioning towards
that approach.
Professional Fee for Valuation of Assets Held As Security
VMU of CRCD will convey Service Charges Grid for each type of assets (i.e. Land,
Building/Civil works, Machinery, Commodities & Current Assets) on annual basis.
Head of CRC shall be authorized to finalize the Service Charges Grid.
The payment of valuation fee shall be made through Vendor Management Unit
CRC, where valuation has been arranged through CRC. Direct payment by the
customers is not allowed. All payments would be made by issuing Pay Order/ DD
in favor of the Valuer. In order to avoid subsequent dispute with client, branches
shall obtain authority letter3 from the borrower,
a. To arrange valuations from Valuer AND;

b. To debit the account for amount of valuation charges (In absence of debit
authority, a cheque of valuation charges can be obtained).
To avoid additional burden on customer and on best effort basis, CRC /SAMG/
Branch would engage those Valuers who are based nearest to the place where
property/assets are located.
Performance Evaluation:
Performance Evaluation of all enlisted Valuers is carried out twice a year.

Evaluation will be initiated for following reasons:
i. Periodic Evaluation:
VMU of CRCD will arrange appraisal of all enlisted Valuers on an annual basis to
determine any change in Valuer’s limit amount, scope regarding nature of assets or
geographical allocation. Mid-year performance evaluation shall be short, targeted
and desktop in nature.
2
Appendix II to Chapter 5.6 (Terms of Reference)
3
Appendix I to Chapter 5.6 (Formant for Authority letter)
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315
ii. Event Driven Evaluation:
Apart from arranging annual reviews, VMU of CRCD will arrange event driven
evaluation upon receiving any material negative information regarding
creditworthiness, integrity, reputation and /or conduct of approved Valuers from
CRC concerns/Branches. All branches/CRC officials are advised to report all such
instances directly to VMU of CRCD. On receipt of valuation report, Branch/RM
should thoroughly examine valuation reports and identify any major variations to
VMU CRC, so that CRC may seek clarifications from any such valuer in writing.
iii. Hindsight Review:
Hindsight review of the Valuers (valuation reports) shall be conducted by VMU-CRC

Lahore. Valuers shall be picked on sample basis and their valuation reports shall
be cross checked by conducting the valuation of the same asset by any other valuer
and remarks shall be presented to Valuers review committee.
Panel of approved Valuers once approved by the competent authority shall be

disseminated on bank wide basis by Vendor Management Unit CRC- Lahore.
5.6.4 MUCCADUMAGE OPERATIONS AND MUCCADUMS
Muccadumage services will be utilized for sites/customers with credit limits

secured by pledge of goods or where independent inspection of Pledged/
hypothecated stocks is required. The job will be assigned to only bank’s enlisted
Muccadums, as notified by CRCD/ CRMD from time to time.
For branches where CRC is not functional, Branch Managers will perform all
functions of CRC officials.
Branches shall not be authorized to appoint Muccadum at a pledge site. All

requests shall be forwarded to VMU of CRCD. Only VMU of CRCD is authorized to
allocate a pledge site to Muccadum.
5.6.4.1 Appointment of Muccadum and Payment
While appointing Muccadum, CRC officials will try to ensure equitable and fair
distribution of business among all enlisted Muccadums. Before entrusting any
fresh site to a Muccadum, CRC officials will seek permission in writing from VMU of
CRCD.
VMU of CRCD responsible for vendor management will allow appointment of a

particular Muccadum after checking following criteria:
i. Total number of sites under charge of requesting Muccadum is less than

Bank’s allocated limit on maximum number of sites to that particular
Muccadum.
ii. Not more than 25% of total sites of the circle are entrusted to the requesting
Muccadum.
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316
However, CRC will not apply above conditions up to 5 sites per Muccadum per
circle or where services of other Muccadums for the area are not available.
In order to keep CRC database updated, branches will immediately inform VMU of
CRCD about allocation of any fresh site to a Muccadum after site is taken over by
Muccadum.
At any point of time, VMU of CRCD may advise CRC officials/branches for change
of Muccadum at any site. Copies of all such letters will be forwarded to the
concerned business group office and Audit Center to ensure compliance of
instructions.
Change of Muccadum may be due to one of the following two reasons,
i. Adverse results of periodic/event driven evaluation of a Muccadum;

ii. Violation of concentration caps applied for a particular area. This includes
appointment of Muccadum without permission from CRCD.
Appointment of Muccadums and Determining Number of Chowkidar
Customer’s request for appointment of Muccadum will be received on bank’s

prescribed format4. After receiving customer’s request, CRC officials will prepare
Appointment letter to take possession of the pledged stocks5 OR to arrange
independent inspection of stocks6 and convey any special precautions pertaining to
particular site/commodity/client in this letter.
Before allowing any drawdown to the borrower under pledge based finance,
Relationship/Branch Manager would undertake a site inspection. Concerned
Relationship/Chief Manager will prepare a report in writing to Unit Head
Relationship/Regional Manager with copy to concerned CRC official
regarding discrepancies like non availability of firefighting equipment, improper
stacking, un-acceptable stocks condition, non-standard procedures being followed,
details of multiple borrowings (if applicable) and number of chowkidar/ Godown
keepers to be posted at the site. A copy of the report must be kept in credit file of
the customer.
Corporate Head/ Business Head can allow waiver from site inspection required
before entrusting any fresh site to a Muccadum. However, determination of number
of Chowkidars will be responsibility of Business Units.
The maximum period of Muccadumage for a specific customer's site shall be one
year. Continuation of Muccadumage for second year shall require approval from
relevant Group Head. President shall have the authority to approve continuation of
Muccadumage beyond two years.
Remuneration of Muccadum:
Payment of muccadum service charges shall be routed through CRCD. Payment to

Muccadum shall be made by CRCD through centralized process by direct debit to
4
Authorization for appointment of Muccadum from Bank’s Customer (Appendix III to Chapter 5.6)
5
Format for letter to Muccadum to take possession of Goods Pledged with bank (Appendix IV to Chapter 5.6)
6
Format for letter to Muccadum for independent inspection of stocks (Appendix V to Chapter 5.6)
_________________________________________________________________________
317
borrower’s current account. Branches must ensure that borrowers, availing pledge
based facility, shall maintain sufficient credit balance in their current accounts or
cushion in RF limits is available to settle monthly Muccadum Service Charges. In
case if debiting the borrowers accounts for Muccadum service charges results in
excess over limit or negative balance in the borrowers account. Branches will
arrange to clear such negative balances in current account / regularization of
excess over limit in RF immediately either by recovery from the customer or by
debit the amount to respective loan account (including classified accounts). In no
case negative balance in the current accounts or Excess over RF limits should
stand beyond next working day.
For accounts under litigation (Legal Cases), Muccadum service charges shall be
debited to branches’ recoverable account ‘Muccadum Charges Recoverable’ (GL
Code 2090802340) through centralized process. Branches shall maintain customer
wise record of such recoverable amounts. Total amount recoverable from the
customer must be clearly mentioned in settlement proposals along with other
obligations (i.e. principle amount and mark up amount etc.).
CRC/ Branches will ensure, minimum two Chowkidars must be appointed at each
site, as 24 hours posting of a Chowkidar is not allowed.
Storage Conditions
Due to any reason, whether shortage of goods in past or difficulty in managing

stocks at borrower’s premises (i.e. in case of multiple borrowing), it is advised that
pledged goods should not be allowed to be stored in borrower’s premises, but to be
stored at a secured place outside Mills / Borrower’s premises. Goods under bank’s
pledge should remain under lock and key, duly insured, except where approval for
open pledge is held.
If deemed necessary by Relationship/Branch/ Approving authority, borrower will

be asked to provide authentic laboratory report of various goods coming under
pledge to ascertain the condition and value of stocks.
While appointing Muccadum VMU of CRC to ensure that multiple borrowing

against pledge of stocks of different customers to a single Muccadum at a single
site is not allowed.
However, pledge of stocks of different customers at a single site to a single

muccadum may be allowed, subject to the following conditions:
1. The relaxation to be allowed to borrowers engaged in rice husking only.
2. Maximum four (04) huskers to be allocated to a single muccadum at a single
site as mentioned above.
3. Track record of the borrowers should be clean with no history of default and
stock shortage.
4. The husking unit must be exclusively mortgaged to MCB to the satisfaction of
Legal Affairs Division / bank’s lawyer.
5. Approval of finance of the respective borrowers to include specific approval for
co-husking of paddy on that particular husking unit.
6. Borrowers of other banks not to be allowed to co-husk and store their stocks on
such sites.
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318
7. Number of godown keepers /chowkidars to be determined by CRC based on the

exposure / quantum of stocks pledged at a single site.
Maintenance of Godown Inspection Register:
Godown Inspection register must be maintained for each site disclosing each
in/out of inventory & all inventory changes should match their corresponding stock
reports provided to Bank. All corresponding changes in level of stocks &
outstanding will also be updated at branch in relevant register(s).
Muccadum’s supervisory staff will visit each site at least once every fortnight, or
earlier and record details of verifications/observations made during their visit of
Godown in Godown Inspection register. Bank’s executive/officer will sign the
register upon their visit to site & if any shortcomings are found, that will also be
noted in the register. This register will be the property of Bank and at the end of
Muccadumage services, it should be acquired from Muccadum by the business
units.
Reporting
Branches will forward a monthly statement showing total number of sites under
custody of various Muccadums to GM office. GM office will forward the same to
VMU of CRCD after consolidating the statements received from branches of their
respective circles7.
Apart from routine reporting, branches will immediately inform to VMU of CRCD
about allocation of a fresh site to a Muccadum after handing over site to the
Muccadum.
Appointment of Chowkidar:
Above policy guidelines are applicable for all sites / customers except where
i. The finance amount is up to Rs5.000 Million and either service of bank’s

approved Muccadum are not available for that area or Branch
Manager/Regional Manager does not deem it feasible. Then the branch is
allowed to appoint Chowkidar subject to obtaining prior approval of G.M.
This exception shall not be applicable to sites where more than one
customer has pledged their stocks for the purpose of co-husking / co-
ginning / seed crushing.
ii. The finance amount is above Rs.5.000 Million but less than 50.000M and
services of bank’s approved Muccadum are not available for that area,
then the branch is allowed to appoint Chowkidar subject to obtaining
prior permission from business Group Head.
iii. The finance amount is Rs50.000 Million or above and services of bank’s
approved Muccadum are not available for that area, then GH RMG
approval will be required through Head of respective Business Group.
7
Format for monthly reporting from circles (Appendix VI to Chapter 5.6).
_________________________________________________________________________
319
All such approvals will be reviewed at least on an annual basis and all
renewal/enhancement proposals will explicitly mention the appointment of
Chowkidar instead of approved Muccadum.
Clearance before appointment of Chowkidars will also be required from HR. All
record regarding such appointments will be maintained by branches. In this
regard, branches are advised to keep complete details of appointed Chowkidar
along with attested copy of NIC.
Process flow sheets for appointment of Muccadums
Below are the process flow sheets for appointment of Muccadums in WBG & CBBG
branches.
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320
5.6.4.2 Disbursement against Pledge of Stocks
Guidelines regarding disbursement against pledge of stocks
Apart from described responsibility segregation and disbursement mechanics,

following guidelines will be observed at the time of disbursement against pledge of
stocks.
a. On routine basis, Muccadum is required to provide stock report on bank’s

prescribed format8 up till 3rd working day of each month. However, in case of
change in inventory (quantity & value of stock) stock report will be received
within one working day of such change. Muccadum will provide stock
statement to the Bank as per the following schedule:
i. at the time of takeover of pledge site,
ii. at the time of movement of stock, either in or out,
iii. at every month-end, irrespective of any stock movement during the
month.
b. While submitting stock statement to the Bank, it shall be mandatory for

muccadum to obtain Borrower’s authorized signature on the stock
statement.
8
Format for stock reports.(Appendix VIII to Chapter 5.1)
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321
c. No disbursement would be made unless stock report duly signed by

authorized signatories of Muccadum is not received. Branch will obtain list
of all authorized signatory of Muccadum at the time of appointment.
d. Separate file(s) would be maintained for stock reports and disbursement

requests of individual customers.
Process flow sheets for Disbursement against Pledge of stocks.
Process flow sheets for disbursement against pledge of stocks in WBG & CBBG
branches are as below.
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322
5.6.4.3 Issuance of Delivery Order9
Guidelines for issuance of delivery order

Apart from described responsibility segregation and mechanics for issuance of
delivery order, following guidelines will also be observed.
a. All Delivery orders will be signed by two authorized persons of the branch
whose names & signatures would be provided to the Muccadums at the time
of appointment.
b. Separate files will be maintained for individual customer’s stock release

requests and issued delivery orders.
c. It will be mandatory for the muccadum to release pledged goods to the

borrower only against proper acknowledgement. Bank will provide Delivery
Order in duplicate to the muccadum. While allowing physical delivery to the
borrower, muccadum will obtain signature of authorized persons of the
borrower on the Delivery Order. Muccadum will provide duly acknowledged
copy of Delivery Order to respective branch for their record.
Process flows for Issuance of Delivery Order

Process flows for issuance of Delivery Order in WBG & CBBG branches are as
below,
9
Format of Delivery Order Appendix VII to Chapter 5.6
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Delivery Order
Borrower
Stock release Borrower takes

Letter is prepared Delivery of Stock
Muccadam
Stock
Sends borrower’s
Released
acknowledge copy
(DO in Duplicate)
of DO to Branch
Asks Borrower for

adjustment in it’s
a/c
Disbursement / Files
Delivery Order File acknowledgement
CBBG
No
Reserve balance Reduce

Release Request Delivery Order Implemented
Letter Signature DO Calculation in a/c for value of Yes
Verification Sheet Prepared stock to be Issued Limit inline with
released Current DP
CR C
5.6.4.4 Evaluation and Delinquency Reporting
Evaluation can be initiated for two reasons:
a. Periodic Evaluation:
VMU of CRCD will arrange evaluation of all enlisted Muccadums on Bank’s
approved panel. Muccadum Performance Report will be arranged from all circles by
the end of every year. Muccadum Performance Report (for all Muccadums operating
in their respective area) shall be jointly signed by GM and relevant Business Head
at the time of annual review of the performance of Muccadums. In case of Islamic
Banking and WBG, same shall be signed by relevant Regional Manager for all
Muccadums operating in their respective area. No Muccadum shall be considered
for approval at the time of annual review without obtaining Muccadum
Performance Report.
b. Event Driven Evaluation:

In the event of material discrepancy, evaluation of the Muccadum will be carried
out immediately. Instances in this regard include failure of terms and conditions
prescribed by the bank or handing over goods to customer without the issuance of
delivery order from bank etc. CRC/Branches shall immediately inform all such
instances to VMU of CRCD.
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324
5.6.5 C&F AGENTS AND CLEARENCE OF IMPORTED GOODS
Clearing Agents services are required, whenever some branch process customer’s
request for import of goods against bank’s financing from abroad and needs to
fulfill the port/custom requirements for taking up custody of goods. Clearing &
Forwarding (C&F) agents arrange clearance of shipment from the vessel through
custom’s gate and take control of goods for onward delivery as per bank’s approved
arrangements.
Clearing of goods imported under bank’s lien will be entrusted only to Bank’s
approved C & F Agents to be notified by CRCD.
5.6.5.1 Appointment of C&F Agent
Karachi Main branch and Nila Gumbad branch-Lahore shall continue to be

designated branches for handing over C&F documents to approved C&F Agents of
Sea Ports and Dry Port respectively. All non-designated branches will arrange
clearance of shipment through these two designated branches.
Service mechanism for clearance of documents is as follows.
Import of goods under Bank’s Lien/Pledge
Branches shall provide list of bank’s enlisted C&F agents to the customer
requesting import of goods to be placed under bank’s lien/pledge.
Selection of C&F agent
Customer negotiates rates with any of bank’s enlisted C&F agent and informs the
branch. Branches shall process customer’s request after obtaining a letter of
authorization10 for appointing C&F agent.
Forwarding documents to C&F agent
After verifying customer’s signature, branches shall forward copy of Letter of

Authorization to respective designated branch along with covering letter as per
prescribed format11 and following documents related to import of goods.
• Performa Invoice
• Packing List (Providing case wise details regarding nature of goods, quantity,
weight etc.)
• Original Bill of Lading endorsed in favor of designated branch
• Commercial Invoice
• Sales Tax Registration Certificate
• L/C and amendments if any
• Importer’s NTN Certificate
• Copy of monthly sales tax challan
10
Letter of Authorization (Appendix VIII to Chapter 5.6) shall be obtained for all goods except of liquid
consignments; In case of Liquid consignments Appendix IX to Chapter 5.6 will be used.
11
Letter for forwarding of Import documents to Designated Branch (Appendix X to Chapter 5.6).
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325
• Tariff Code
Handing over documents to the C&F agent
Designated branches shall prepare letter as per prescribed format (Annexure XI to

Chapter 5.6) for forwarding the documents to nominated C&F agent and obtain
acceptance from C&F agent on its copy. Documents shall be endorsed in favor of
the C&F agent and handed over to its representative. Proper records of limits,
outstanding of all C&F agents will be maintained on SB-104 register (Clearing
Agent wise record) & SB-105 (Clearing document wise record).
5.6.5.2 Mechanics for Clearance of Goods
Obtaining Delivery Order of Shipping Company
The C&F agent submits original bill of lading and invoice to the local agent of
shipping company and obtains Delivery Order. This Delivery Order is submitted to
Custom department at the time of taking delivery of goods.
Custom requirements
C&F agents arrange custom clearance of imported goods by one of the following two
(2) mechanics.
a- Manual filing of General Declaration (GD)
C&F agent files General Declaration (GD) to Custom department as per Bill of
Lading. If GD matches with Import General Manifest (IGM) lodged by the
Shipping line or shipping agent; Custom department conveys applicable duty
amount after arranging its appraisement. After payment of all duties and taxes
against GD, custom authorities arrange inspection of goods at the port (if
required). If goods are found according to declaration, custom authorities stamp
the GD for Release Order.
Goods shall be released from Terminal gate upon submission of GD duly

stamped for Release Order and above mentioned Delivery Order issued by the
local agent of shipping company.
b- Electronic filing of General Declaration (GD)
General Declaration (GD) is lodged on line in computerized environment under

Pakistan Customs Computerized System (PACCS) and applicable duty payment
is arranged first after which release order is received electronically.
Goods are released from Terminal gate upon receiving of web based Release
order from Custom department and Delivery Order issued by the local agent of
shipping company.
Handing over the goods
C&F agent provides importer’s copy of GD to the bank and hand over the goods to
bank’s representative/Muccadum as per arrangements conveyed by the bank.
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326
Sub delegation- Not Allowed

Designated branches are required to ensure that under no circumstances the
bank’s approved C&F agent is allowed to assign/ handover/ delegate the Clearing
& Forwarding job to any other C&F agents.
5.6.5.3 Clearance of Goods Stored in Bonded Warehouse
Bonded warehouses are authorized by custom department to store goods for which
payment of duty is deferred until goods leave the warehouse.
Clearance mechanism for In-bonded goods
Clearance mechanics for in-bond goods can be summarized as,

i. In-Bond GD is filed for clearance of goods from the port and their storage in
bonded warehouse. After clearance from the port, goods are delivered to the
bonded warehouse before payment of custom duties.
ii. Upon in bonding of goods, bonded ware house provides ware house receiving
at the back of importer’s copy of In-bond GD and issues Storage
Certificate/Letter.
iii. At the time of Ex-bonding, an Ex-Bond GD is filed for taking delivery of
goods. Upon receiving of Ex-Bond GD, Custom authorities check warehouse
receiving at the back of importer’s copy of In-bond GD and receipt for
payment of applicable duties. If found in order, Ex-bond GD will be stamped
for Release Order.
iv. Bonded ware house allows ex-bonding of goods after receiving of Custom’s
Release Order.
v. In case of Electronic clearing this Release Order is received electronically and
custom authorities do not require warehouse receiving at the back of
importer’s copy of GD.
Guidelines to arrange clearance of In-bonded goods
When goods are to be stored in bonded warehouses, following guidelines shall also
be complied:
a. If goods are cleared by manual filing of GD;

Designated branches shall ensure that C&F agents immediately after storage
of goods in bonded warehouse; deliver the original Importer’s copy of GD and
storage certificate/letter issued by the bonded warehouse to the concerned
branch.
In case the concerned branch do not receive Importer’s copy of GD and
storage certificate within two working days (2) of delivering documents to the
C&F agent and payment of custom duties; they shall follow-up with the
Clearing and Forwarding agent for obtaining the same, so as to ensure that
goods are not ex-bonded un-authorized.
b. If goods are cleared by Electronic filing of GD;
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327
C&F agent is required to provide bonded warehouse storage certificate/letter

and print out of electronically filed GD. As Terminal gates receive electronic
confirmation about payment of duties, Custom authorities do not require
importer’s copy of electronic In-bond GD for Ex-bonding of goods.
Unauthorized ex-bonding may happen after payment of taxes directly to
custom department.
Whenever clearance is arranged by electronic filing of GD, Muccadum will be

appointed at the ware house to avoid any unauthorized release of goods.
Bonded warehouse storage certificate/letter should clearly describe that the goods
shall be delivered upon receiving bank’s Delivery Order.
The above described procedure for bonded cargo is also applicable for Liquid Cargo
under bank’s lien.
5.6.5.4 One-off Transactions Where C&F Agent is Not on Bank’s Panel
All one-off requests shall be forwarded to CRCD. The turn-around-time (TAT) for
decision on such requests is 2 days after the request is received by CRCD.
While elevating One-off transaction request, concerned branches shall include
customer name, C&F agent name, CRR of customer, nature of commodities being
imported, country of origin and amount of such import.
All such transactions will be approved at Group Head RMG level. In absence of
Head RMG, this authority will be exercised by Acting Group Head RMG.
Customer shall be requested to provide an undertaking12 from the C & F agent.

This undertaking will remain valid as long as customer want to arrange clearance
of goods through specific C&F agent and relevant approval for the agent is held.
Clearance of individual consignments shall be arranged by forwarding instructions
to the C&F agent on Appendix X to Chapter 5.6
5.6.5.5 Clearance Documents Handling Commission (CDHC)
Branches will recover CDHC as per bank’s schedule of charges. Recovered

commission amount shall be shared between originating branch and the
designated branch on 50% basis.
5.6.6 TANK TERMINALS & HANDLING STOCKS OF LIQUID CARGO
In addition to logistical reasons for storage of liquid cargo at Tank Terminals, from
bank’s perspective it also serves two purpose,
12
Undertaking from C & F agent not enlisted on Bank’s panel ( Appendix XI to Chapter 5.6)
_________________________________________________________________________
328
1. An imported liquid cargo is a prime security for the finance amount. When
off-loaded at the port it needs to be immediately placed under bank’s pledge.
The Tank Terminal operators take custody of the liquid cargo and acts as a
Custodian of the bank. Tank terminal releases the pledged cargo upon
payment of bank’s dues (principal + markup) and after receiving of Delivery
Order from the bank.
2. Tank Terminal operators also act on behalf of the bank to ensure that the
liquid cargo is released after compliance of all legal formalities of Custom
clearance. If the importer fails to clear the formalities of customs then the
state can lay claim to the imported goods to settle the amount of its taxes.
In such a case the claim of state over the imported goods takes precedent
over all other rights/claims/charges thus override/ nullify the collateral
status of the imported liquid cargo against the availed finance. The Customs
in such an irregular case can impound all of the imported cargo even the
portion which is still in the custody of the Tank Terminal Operator.
The list of approved Tank Terminals is circulated by CRCD from time to time.
Execution of Tripartite Agreement
Before opening any L/Cs involving liquid cargo, concerned branch/circle office
shall obtain a Tripartite agreement13 from the importer specifying name of a bank’s
enlisted Tank Terminals where such liquid cargo shall be stored on its arrival at
Karachi and send this agreement to Karachi Main Branch for further execution
with the Tank Terminal Operator. This agreement shall be obtained/ executed for
every LC involving liquid cargo. The Tripartite agreement will remain in force for the
entire duration of the LC. Karachi Main Branch after getting the agreement
executed shall send back the duly executed agreement to concerned branch, after
retaining a photocopy.
Clearance of shipments shall be arranged as per service mechanism described in

Section-5 “C&F Agents and Clearing of Imported Goods” and a letter of
authorization (Appendix VIII to Chapter 5.6) will be obtained for appointment of
both C&F agent and Terminal operator.
Considering the risk that customer may not accept or retire the documents received
under Sight L/C and Bank may have to make arrangements for storage and
clearance of goods at its own cost, this Tripartite Agreement shall be executed for
both Sight and Usance L/Cs.
Off-Loading of Liquid Cargo
To off-load liquid cargo, sea departing tanker is piped out in the Tanks of approved
Terminal at Karachi ports (i.e. namely Kemari Port, Port Bin Qasim or Gawadar sea
port). Customer arranges clearance of consignment from custom authorities via
bank’s enlisted clearing agent.
13
Draft of Tripartite agreement for storage of oil (Appendix XII to Chapter 5.6)
_________________________________________________________________________
329
After off-loading of liquid cargo, branches will ensure that Terminal’s storage
certificate/letter restricting liquid delivery upon receiving bank’s Delivery Order
must be obtained from clearing agent.
Issuance of Delivery Orders
Concerned Branch Manager or any other bank’s officer/executive authorized by the

concerned General Manger shall sign all delivery orders (DO) for release of liquid
consignments from Tank Terminal at Karachi port or Port Qasim and forward these
DO to Karachi Main Branch. All such DO shall be countersigned by the person(s)
authorized by General Manager overseeing Karachi Main branch.
Concerned branches shall maintain separate files for all such customers and
update record of stock position and outstanding against issuance of each delivery
order.
5.6.6.2 Precautions
The General Manager overseeing Karachi Main Branch shall advise name, employee
number and signature of such countersigning persons to Vendor Management Unit
at Credit Risk Control Division so that the same may be advised to all our approved
Tank Terminals with an instruction not to allow delivery of any cargo under Bank’s
Lien unless Delivery Order is countersigned by such person(s). Name of such
authorized persons will be reviewed at least once in a year by the designated
(Karachi Main) Branch and in case of any change a revised list along with specimen
signature shall be conveyed by the General Manger to CRCD for advising to Tank
Terminals.
5.6.6.3 Reporting
Karachi Main Branch shall forward report showing performance of all enlisted Tank
Terminal Operators14. In addition to monthly reporting, Karachi main branch shall
also report any irregularity faced in case of specific Tank Terminal.
5.6.7 VENDORS PROVIDING SERVICES OF CREDIT REPORTS, SEARCH

REPORTS AND LEGAL SERVICES
Knowledge of customer’s credit worthiness is vital for taking any lending related
decision as it helps in gauging of credit risk and supports in mitigation of default
risk. In addition, it also assists in analyzing industry and business risks pertaining
to individual clients and their respective industries.
Practically, there can be no one source that could provide conclusive information
about all such facets and process of obtaining such information is both
methodological and unstructured. In addition, market intelligence cannot
reasonably be obtained in one go but is acquired through a process of gradual
14
Monthly reporting format (Appendix XIII to Chapter 5.6)
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330
analysis over a period of time from a host of various sources, such as other
customers, other bankers, competitors, newspapers, etc. Therefore, it is crucial for
a banker to have accurate knowledge about the developments in the economy and
key industries being focused by the Bank.
Bank’s enlisted external vendors provide different reports/searches that provide

disclosure about customer’s financial strength, business/marketing strategy,
management’s interests and competence, technology employed, competitors,
customers, suppliers, regulatory and economic environment. Different reports/
searches/ services providing support in risk management are as below.
• Local Credit Report (direct interview with borrower)
• Market Reputation Checks (without contacting borrower)
• SME Credit Reports (direct interview with borrower)
• Charges Search Reports
• Certified True Copies of Form29, Form-A, or any other document from SECP
office.
• Charge Registration
• Legal Service
• International/Cross-border Credit Report
Presently following firms are enlisted on bank’s panel for provision of above
mentioned risk management reports/services. Any further enlistment of firm(s)
shall be notified by CRMD.
• International Credit Information Ltd (ICIL)
ICIL primarily works as credit information provider and is distributor of Dun &
Bradstreet (D&B) products in Pakistan. Presently it is engaged in providing global
as well as local business-to-business credit and legal services to the bank.
• IFI Consultants (IFIC)
IFI Consultants are associated with ‘Coface Euro DB’ and ‘Graydon International’
as collaborators, which are based in Belgium and UK respectively and provide risk
management services for Cross-border Credit Reports.
Selection of Vendor
Vendor for various risk management services shall be selected in accordance with
CRMD circulars (on various vendors) issued from time to time.
Requiring Services / Reports and Payments

i) Branches/Trade Services Centers (TSCs)/ Regional offices shall send request
letter15 to local representative of the vendor for providing required
documents or execution of required service.
15
Format of request letter to vendors (Appendix XIV to Chapter 5.6).
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331
Branches/TSCs may also forward Cross-border credit reports requests to IFI

consultants via email or web based ordering. In order to reduce Turnaround
Time (TAT), all TSCs are advised to contact IFI Consultants to obtain
username and password to arrange web based requests.
ii) a) On receipt of bank’s request letter, vendor shall perform required services
and confirm the requesting branch/TSC/office for execution of required
formality. Moreover, they shall also forward all requisite documents/reports
along with an invoice.
b) In case of delay, branches shall contact vendor’s Head Office and send
copy of this letter to CRCD.
iii) The concerned branches on receipt Report or completion of formality shall

remit the charges within 48 hours through Pay-order/ Demand Draft
quoting vendor’s Invoice number and date. In case payment is to be made in
Pak Rupee equivalents, TT/OD selling rate will be applied
iv) Before requesting for the services, branches are advised to obtain either
Debit Authority or cheque for the charges amount from the customer.
Where a customer is not maintaining an account with the Branch and report
is deemed necessary; such expense may be debited to MISC Expense
Account, or recovered in advance from the party, at the discretion of Branch
Manager / concerned office.
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332
Credit Handbook
Section 5
Appendices
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333
Eligible Collaterals under Standardized Approach to Credit Risk

Simple Approach
S.No. Name of the Minimum conditions for Risk translation

eligible eligibility/Operational requirements (specific)
collateral
1 Cash & Cash Cash (as well as certificates of deposit 0%

Equivalent* or comparable instruments) on deposit
with the bank, which is incurring the
counterparty exposure.
2 Gold. Gold Bullion, ornaments etc. 20%
3a Debt securities Rated by a recognized external credit 0-150%

(rated) assessment institution where these are
depending upon
either:
issuing entity’s
a) at least rated ‘4’(SBP rating grade) external rating and its
when issued by sovereigns or PSEs that asset class.
are treated as sovereigns by SBP or
Their benefit can only
b) at least rated ‘3’ when issued by be taken if their risk
other entities (including banks and translation is lower
securities firms); or than that of the
counterparty.
c) at least rated ‘S3’ for short-term debt
instruments.
3b Debt securities Not rated by a recognized external 50%

(unrated) credit assessment institution where
these are:
be taken if their risk
a) Issued by a bank; and translation is lower
than that of the
b) Listed on a recognized exchange; and
counterparty.
c) Classified as senior debt; and
d) All rated issues of the same seniority
by the issuing bank are rated at least
‘3’/‘S3’ by a recognized ECAI; and
e) The bank holding the security as
collateral has no information to suggest
that issue justifies a rating below
‘3’/‘S3’ and
f) SBP views such securities as liquid
and marketable.
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334
4 Equities Included in the main index i.e. KSE 0-150%
(including
depending upon
convertible
issuing entity’s
bonds)
external rating and its
asset class.
be taken if their risk
translation is lower
than that of the
counterparty.
5 Undertakings a) Price for the units is publicly quoted 0-150%

for Collective daily; and
depending upon
Investments in
b) The UCITS/mutual fund is limited issuing entity’s
Transferable
to investing in the instruments listed in external rating.
Securities
the main index. However, the use or
(UCITS) and Their benefit can only
potential use by a UCITS/mutual fund
mutual funds be taken if their risk
of derivative instruments solely to
translation is lower
hedge investments listed above and
than that of the
under the Comprehensive Approach to
counterparty.
credit risk mitigation shall not prevent
units in that UCITS/mutual fund from
being eligible financial collateral.
6 Guaranteed i) A guarantee (counter-guarantee) 0-20% and a lower risk

transactions must represent a direct claim on the weight than the
protection provider and must be counterparty.
explicitly referenced to specific
The protected portion
exposures or a pool of exposures, so
is assigned the risk
that the extent of the cover is clearly
weight of the protection
defined and incontrovertible. Other
provider. The
than non-payment by a protection
uncovered portion of
purchaser of money due in respect of
the exposure is
the credit protection contract it must be
assigned the risk
irrevocable; there must be no clause in
weight of the
the contract that would increase the
underlying
effective cost of cover as a result of
counterparty. A lower
deteriorating credit quality in the
risk weight may be
hedged exposure. It must also be
applied to a bank’s
unconditional; there should be no
exposure guaranteed
clause in the protection contract
by a sovereign (or
outside the control of the bank that
central bank) where
could prevent the protection provider
the exposure is
from being obliged to pay out in a
denominated in
timely manner in the event that the
domestic currency of
original counterparty fails to make the
that sovereign and
payment(s) due.
funded in that
iii) In addition to the legal certainty currency
requirements, the following conditions
must be satisfied:
a) On the qualifying default or non-
payment of the counterparty, the bank
may in a timely manner pursue the
guarantor for any monies outstanding
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335
under the documentation governing the
transaction. The guarantor may make
one lump sum payment of all monies
under such documentation to the bank,
or the guarantor may assume the
future payment obligations of the
counterparty covered by the guarantee.
The bank must have the right to receive
any such payments from the guarantor
without first having to take legal
actions in order to pursue the
counterparty for payment.
b) The guarantee is an explicitly
documented obligation assumed by the
guarantor.
c) Except as noted in the following
sentence, the guarantee covers all types
of payments the underlying obligor is
expected to make under the
documentation governing the
transaction, for example notional
amount, margin payments, etc. Where
a guarantee covers payment of principal
only, interests and other uncovered
payments should be treated as an
unsecured amount.
iv) Eligible guarantors (counter-
guarantors). Sovereign entities, PSEs
and other entities with a risk weight of
20% or better and a lower risk weight
than the counterparty.
Comprehensive Approach
All of the instruments eligible under Simple Approach along with the following changes
i) Equities Listed on a recognized exchange and/or Based on their

(including part of the main index respective Haircut
convertible
bonds)
ii) UCITS/mutual a) Price for the units is publicly quoted Based on their
funds daily; and b) the UCITS/mutual fund is respective Haircut
limited to investing in the instruments
listed on a recognized exchange and/or
part of the main index.
However, the use or potential use by a
UCITS/mutual fund of derivative
instruments solely to hedge
investments listed above and under the
Comprehensive Approach to credit risk
mitigation shall not prevent units in
that UCITS/mutual fund from being
eligible financial collateral.
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336
Standard Supervisory haircuts
Issue rating for Sovereigns Other issuers
debt securities Residual Maturity
~~1 year 0.5 1
1-5 >1 year, ~~5 years 2 4
>5 4 8
2 –3 ~1 year 1 2
and unrated bank >1 year, ~ 5 years 3 6
securities as defined >5 years 6 12
in
Para 2.6.2.1(iv)
4 All 15
Main index equities (including convertible 15
bonds) and Gold
Other equities (including convertible bonds) 25
listed
on a recognized exchange
UCITS/Mutual funds Highest haircut applicable to any
security in which the fund can invest
Cash in the same currency 0
Specific Treatment of Proportional Cover and Multiple CRM Technique
Where the amount guaranteed is less than the amount of the exposure and the
secured and unsecured portions are of equal seniority, i.e. the bank and the
guarantor share losses on a pro-rata basis, capital relief will be afforded on a
proportional basis: i.e. the protected portion of the exposure will receive the
treatment applicable to eligible guarantees/credit derivatives, with the remainder
treated as unsecured.
In the case where the bank has multiple CRM techniques covering a single
exposure (e.g. the bank has both collateral and guarantee partially covering an
exposure), it will be required to subdivide the exposure into portions covered by
each type of CRM technique (e.g. portion covered by collateral, portion covered by
guarantee) and the risk-weighted assets of each portion must be calculated
separately.
*when a cash on deposit, certificate of deposit or comparable instruments issued by the

lending bank are held as collateral at a third party bank in a non-custodial arrangement, if
they are openly pledged/assigned to the lending bank and if the pledge/assignment is
unconditional and irrevocable, the exposure amount covered by the collateral (after any
necessary haircuts/adjustments for currency risks) will receive the risk weight of third
party bank.
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337
Eligible Collateral acceptable by Bank for financing
Type of Approval Level*
Sr. # Type Examples
Charge
A Immovable Fixed Assets Mortgage/ Allowed at all levels
Properties Land, Building, Fixed/ Floating
Machinery Charge
(immovable)
B Movable
Properties
i) Tangibles Stocks/ Raw Hypothecation/ Allowed at all levels
Material/ Pledge/
Finished Good/ Floating
Machinery/ Charge
Commodities
ii) Intangibles Receivables, book Hypothecation/ Allowed at all levels
debts Assignment
iii) Marketable
Securities
a) Equities Shares listed on Electronic Allowed at all levels
Stock Exchange Pledge
(Please refer to
Chp # 6.7 For
Guidance)
b) Debts
b- Government Securities issued Pledge Allowed at all levels. For
1) by NSC (DSC’s, purpose of CA/ RA to
SSC’s, RIC’s etc.). be considered to Cash/
Near Cash Collateral
Pakistan Pledge Pre fact Review required
Investment Bonds at RMG. Approval/
(PIB’s) review level within RMG
Treasury Bills and above will be as per
Any other exposure (minimum
Government SCO 1)
Security
b- Private Entities TSC’s, Commercial Pledge Pre fact Review required
2) Papers etc at RMG. Approval/
review level within RMG
and above will be as per
exposure (minimum
SCO 1)
c) Mutual Funds NIT Units, other Pledge Pre fact Review required
mutual fund at RMG. Approval/
certificates review level within RMG
securities and above will be as per
exposure (minimum
SCO 1)
iv) Cash Collateral MCB Own Deposit Lien
(Pak Rs.)
MCB Own Deposit
FCY
Other Bank Lien Allowed at all levels
Deposit (Pak Rs.)
Other Bank
Deposit (FCY)
MCB Deposit Pledge
Receipt
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338
Other Bank
Deposit Receipt,
COI etc.
SBLC’s or Guarantee
guarantees of
Banks for which
FID line allocation
is obtained
MCBAMC Dynamic Lien
Cash fund/ Cash
Management
Optimizer fund
v) Other Forms of Personal Guarantee Allowed at all levels
Collateral Guarantees,
Financial/
Corporate
Guarantees
Any other Pre fact Review required
collateral that do at RMG. Approval/
not fall under any review level within RMG
category and above will be as per
exposure (minimum
SCO 1)
Collateral not acceptable as security
Items specifically banned by SBP.

Items whose trade declared illegal by Government.
Properties/ Securities in the name of Minor.
Precious stones, gems, antique etc. (Those with highly fluctuating value)
Gold, Jewelry, ornaments (including artificial/ imitated jewelry etc.
Eligible Collateral under Basel II
Bank is following standardized approach (Simple Approach) for calculation of capital charge
under Basel II. Please refer to Annexure 5.1.9 for details regarding eligible collateral under
Basel II.
Under simple approach, where a transaction is secured by eligible collateral and meets the
eligibility criteria and minimum requirements, banks are allowed to reduce their exposure
under that particular transaction by taking into account the risk mitigating effect of the
collateral for the calculation of capital requirement
The operational and legal requirements have been built in this chapter regarding eligible
collateral under simple approach
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339
Properties of Public Sector (Government/Semi Government) Development Authorities
Land Revenue Private housing
Cantonment Areas Army Housing
Record LDA/ KDA/ CDA etc. DHA Schemes
(Leasehold rights) Schemes
Registered Sale Allotment Letter/Exemption Allotment Letter Extract from Letter of intimation of First Allotment Letter
Deed/ Gift Deed/ Letter General Land balloting
Exchange Deed Register (GLR)
etc.
Registered Sale Transfer Letter establishing the Transfer Letter First Lease Deed Paid receipt/s of Chain of Transfer Letter
Deed/ Gift Deed/ chain of ownership establishing the chain Terminal Payment or the previous Transfer
Exchange Deed of ownership Letter
etc. of previous
owner
Extract from Sale Deed/Gift Deed/ Sale Deed/Gift Deed/ Sale Deed of Letter of Possession Sale Deed/ Gift Deed etc.
Register Haqdaran Lease`Deed etc. if any. if any. Allotment rights (if if any.
Verified by sold by first lessee)
Tehsildar
Copy of Mutation, Membership Certificate Membership Certificate Completion Formal Allotment Letter of possession
in favor of the (Where applicable) Certificate Letter
present owner as Permission to Mortgage Permission to Mortgage Site Plan Site Plan Membership Certificate
well as the Site Plan Site Plan
Site Plan
Previous owner, Approved Map (in Approved Map (in case
duly issued Approved Map (in case of Approved Map (in case of case of constructed of constructed Approved Map (in case of
through Naqool constructed property) constructed property) property) property) constructed property)
Agency
Tax Payment Documents (in Tax Payment Documents Tax Payment Tax Payment Tax Payment Documents
case of constructed property) (in case of constructed Documents (in case Documents (in case of (in case of constructed
property) of constructed constructed property) property)
property)
Pass Book, if Possession Letter Possession Letter Permission to Schedule IX (B) Share Certificate of the
available Mortgage society
Aks Shajra Completion Certificate (in case Completion Extract of GLR Permission to Mortgage
of constructed property) Certificate(in case of (in case of allotment, not
constructed property) the sale)
NEC Transfer/ Exchange Deed (If NEC if there is a NEC if there is a Permission to NEC if there is a
required in the allotment letter) registered document in registered Mortgage (in case of registered document in
NEC if there is a registered the chain document in the allotment, not the sale) the chain
document in the chain chain
___________________________________________________________________________________________________________________
340
CHECKLIST OF DOCUMENTS REQUIRED
GENERAL – PART A YES NO N/A REMARKS
1. Reapplication for finance / Form MF-5 in case of Agri-Credit

and borrowers Basic Fact Sheet (BBFS).
2. Limited Liability Companies
a. Memorandum of Association
b. Articles of Association
c. Certificate of Incorporation
d. Certificate of Commencement of Business

(Only required for Public Limited Companies)
e. Form 29 (List of Directors)/ Form A
f. Attested copies of CNIC’s of all directors
3. Partnership
a. Partnership Deed signed by all partners
b. Attested photocopies of CNIC’s of all partners
c. Attested copy of Registration Certificate with Registrar of

Firms. (In case partnership is registered)
4. Sole Proprietorship
a. Attested photocopy of CNIC
b. Trade body Association Letter/NTN, if applicable
c. Sole proprietorship declaration
5. Board Resolution (BR)
a. Does the BR authorize
- borrowing entitlement
- Authorization to offer assets of company as security
- Name of the person(s) authorized to deal with Bank is/are

mentioned.
b. BR duly typed on company’s letter head or on white
paper with company stamp.
c. Signature of Company Secretary/Director and rubber
stamp affixed on all pages.
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341
d. Name of the authorized signature(s) (Company Secretary
and/or Director) noted in pencil.
e. Cuttings are authenticated.
f. Has the BR been dated?
g. Does the date of BR correspond to the facilities extended

to the client, i.e. date of BR should be prior to the date
of extending facilities.
- If not, then does the wording in the BR highlight / cover
all borrowings prior to this BR.
h. Does the BR provide specimen signature(s) of authorized
signatories?
i. Signature verified by Branch / Relationship Manager
6. Personal guarantee of Directors specifying (in case of Ltd

Companies):
- Names of those exempted
- Names of remaining directors
7. Mark-up Agreement (IB 6 K/ IB-6A / IB-6B / 6-C / IB-7 / IB-
31 duly stamped), for the total amount involved i.e. purchase
price and mark-up for the agreed period at standard mark-up
rate
8. Demand Promissory Note (IB-12) duly signed by authorized
signatories bearing company seal (where applicable)
9. Sufficient, tangible prime / collateral securities of stable
value and of an easily realizable nature, and
10. Adequate insurance, as appropriate, covering assets charged
in Bank's favor, the cost of insurance to be borne by the
borrower.
11. eCIB report
12. Charge Registration in case of Limited Liability Companies
a. Certified Copy of Charge Registration certificate
b. Certified Copy of chain of Form 10/ 16 where applicable
c. Certified copies of Instrument creating Mortgage/ Charge

(IB 25-A/ IB 24 etc.)
d. Ranking of charge is as per Approval of Finance and
Search report to the effect held
e. Ranking of Charge properly mentioned in Form 10/16/
Security Documentation
f. NOC obtained from Senior Lenders (If applicable)
obtained
g. Final Legal Clearance to the effect of Charge Perfection
and Ranking of charge is held
13. CORPORATE FINANCING – CONSORTIUM FINANCE
A. In case where MCB is Lead bank/ Security Trusty
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342
1. Complete Original Documentation is held by MCB in capacity
of Lead Bank/ Security Trusty
2. Documentation is complete as per Syndicate/ consortium
finance agreement/ Credit Approval
3. No Objection Certificate held from all concerned banks (If
applicable)
4. Clear Legal opinion from Transaction lawyer
5. Other Mandatory/ Credit requirements (insurance policies,

stock report, valuation report etc.) have been fulfilled as per
credit approval/ consortium agreement.
B. In case MCB is not Lead Bank
1. Certified True Copies of complete documentation (certified by

lead bank)
2. No Objection Certificate held from all concerned banks (If
applicable)
3. Confirmation from lead bank that all formalities have been
completed in terms of syndicate finance agreement and all
original documents are held with them as security trusty.
4. Clear Legal opinion from Transaction lawyer
5. Certified true copies of Insurance policies/ valuation

report/stock reports etc. have been obtained
6. Other Mandatory/ Credit Requirement have been fulfilled as
per Credit approval/ Consortium agreement.
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343
GENERAL – PART B YES NO N/A REMARKS
HYPOTHECATION (STOCKS AND DEBTS)
1. Standard letter of hypothecation (IB-25A)
2. Schedule of agreement properly filled in, description as per

Approval of finance
3. Signature of the company’s authorized person (as per
Board Resolution)
4. Company rubber stamp on all pages of Letter of
Hypothecation (IB-25A) and Form 10 or 16. Name of
persons signing these document to appear on last page.
5. Rubber Stamp of the company duly placed on the last page
of Hypothecation Agreement and Form 10 or 16 (in case of
limited Cos).
6. Are cuttings authenticated?
7. Is letter of hypothecation properly stamped
8. Are signatures verified by Branch / Relationship Manager
9. Facility amount, charge description and charge amount are

as per Approval of Finance (AOF).
10. Stock reports. In case of charge on Book debts, statement
to be held and to be ensured that they are of required
value. Periodic stock report / book debt statement to held.
11. Are assets and location details matching with the CP and
the insurance policy?
12. In case of consortium finance, MCB’s share mentioned
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344
EQUITABLE MORTGAGE
1. Original title deeds pertaining to the immovable property
obtained.
2. Other supporting documents taken:
Letter of allotment.
Approved site plan
Completion Certificate
Non-encumbrance certificate/search certificate.
Extract from Record of right (where the property record
is maintained by Land Revenue Department. Not
applicable in case of KDA / LDA / KMC / SDA / CDA /
DHA etc.).
Conveyance deed (where applicable)
Memorandum of Deposit of Title Deeds (IB-24) backed
by Agreement to create Registered Mortgage.
Agreement to Create Registered Mortgage
Token Registered Mortgaged Deed, if required
Independent valuation of property by Bank’s enlisted
evaluator which should not be more than three years
old during tenancy of loan
No Objection Certificate (where applicable).
Charge Registration on Form 10 / 16 for complete (in
case of Ltd Companies).
Affidavits attesting copies of documents (in case of Ltd
Companies.)
3. Ensure that customer / mortgagor signatures as may be
relevant are verified on all security documents
4. Insurance of property in the name of the bank, as beneficiary
5. Clear Legal Opinion on Title and Final Legal Clearance on
complete documentation obtained
6. Noting of MCB mortgage charge with relevant land authorities
REGISTERED MORTGAGE
1. All documents applicable to Equitable Mortgage
2. Mortgage Deed (bank standard)
3. Has Mortgage Deed been duly executed and registered in
favor of MCB?
4. Noting of MCB mortgage charge with relevant land
authorities
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345
PROMISSORY NOTE (PN)

1. PN Signed by authorized signatories of the Borrower (as per
board resolution duly certified by company secretary or as
per partnership deed etc.) and the stamp of the company is
in place.
2. Signature verified by the branch/ Relationship Manager.
3. Name of the person signing the PN written in pencil.
4. The amount in PN to be marked up price (principal +
markup @ SMR up to expiry)
5. Are the revenue / adhesive stamps properly defaced?
6. Photo copies of National Identity Cards of signatories should
also be obtained.
7. Fresh PN to be obtained at the time of renewal / enhancement
or every 3 years.
MARK-UP AGREEMENT
1. Signed by authorized signatories as per board resolution.
2. The company’s rubber stamp available on all pages.
3. Signature and names of witness affixed / mentioned.
4. Cutting are authorized and approved by Legal Affairs
Department.
5. Name of the person signing the document written in pencil.
6. Is the document witnessed properly?
7. Signature of the company’s authorized signature has been
verified by Branch Manager / Relationship Manager
8. The document has been signed by the Bank’s authorized
signatory.
9. Purchase price filled is as’
Sale prices + Markup @ SMR up to expiry.
Sale price & prompt payment rebate also filled in and no
column left blank.
Note
For all other IB Forms points # 1 to 8 should be observed. Other columns should be
properly filled in as per requirements of relevant IB form.
___________________________________________________________________________
346

PLEDGE OF DEPOSIT CERTIFICATE/RECEIPTS (TDRS) / GOVT.

SECURITIES (DSC/SSCS ETC)
1. Pledge of Original financial instrument duly discharged in
Bank’s favor
2. Letter of Lien (IB-28 & IB-31) from depositor, IB-12 &

Markup agreement from borrower.
3. Depositor's signature of discharge on original deposit
receipt(s) / certificate(s) duly verified by issuing Bank /
Office and Branch. If not, does the pledge agreement say that
the discharge on instrument is not required?
4. Noting of MCB's lien on deposit application form and deposit
register (In case, the Deposit Receipts / Certificates were
issued by other Bank / Branch / Saving Centre, written
confirmation should be obtained from the branch & attached
with the instrument).
5. 3rd Party deposit:
- Letter to be sent by branch to 3rd party confirming that
their deposit has been placed under Bank's lien against
financing to the customer.
- If 3rd party is limited company / non-profit organization,
verification that their memorandum/ trust deed permits
encumbrance for another company / person.
- Has the 3rd party (in whose name deposit receipt /
certificates are) have signed the letter of lien and
discharged the certificate in Bank’s favor.
6. Are the IB Forms / charge documents signed by the
authorized signatories of the borrower company (as per
Board Resolution) / borrower & verified by the Branch /
Relationship Manager
7. Is the name of the person(s) signing Pledge Agreement/ other
documents properly written?
8. Is the stamp of the company in place, not applicable for
individual pledger?
9. Are the details of the securities (DSCs, SSCs and other
certificates) properly mentioned on the agreement?
10. Has the pledger provided an authority letter to pledge the
securities and authorized MCB to encash them at any time?
PLEDGE OF MOVABLE PROPERTY / STOCKS

1. Is the Pledge Agreement (IB-26) signed by the authorized
signatory (s) of the company (as per Board Resolution)
2. Is the stamp of the company in place
3. Is the name of the person(s) signing the Pledge Agreement
written in pencil?
4. Are details of the stocks and their locations properly given on
the agreement
5. Are the signatures on the Pledge Agreement verified by the
Branch / Relationship Manager
6. In case of limited companies, has the pledge been registered
via hypothecation (ranking charge on current assets)?
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347
PERSONAL GUARANTEE OF DIRECTORS (P-G)
1. Is the P-G dated

2. Amount of P-G is equal to the sum of total facilities of the
client. In case of F.B. limits purchased price applicable.
3. Name of the director(s) signing P-G is written.
4. P-G signed by all director(s) as per latest certified copy of
Form 29.
5. Signatures verified by Branch Manager.
6. Personal Net Worth Statements available.
7. Photo copies of computerized National Identity Cards
obtained.
8. Recent photograph of P.G. executor obtained if photograph
on CNIC not clear.
CROSS COMPANY GUARANTEE (X-G)
1. Do the Articles and Memorandum of Company authorize

the company to stand as guarantor for another company
2. Is the Board Resolution available for issuance of X-G.
3. Has the X-G been signed by authorized signatures of the
company (as per the board resolution) and is company seal
properly in place.
4. Name of the authorized signature(s) noted in pencil.
5. Signatures verified by the Branch Manager.
___________________________________________________________________________
348
GENERAL – PART C YES NO N/A REMARKS
RUNNING FINANCE
1. Promissory note, duly stamped (IB-12)
2. Mark-up Agreement
3. Sufficient, tangible securities with or without collateral,

realizable of stable value with necessary documentation [e.g.
Letter of Hypothecation (IB-25A) / IB-28 & IB-31 in
case of Deposit Certificates, Shares / Securities etc. For
property including IB-22or IB-24, etc.], and;
4. Adequate insurance, as appropriate, covering assets charged
in Bank's favor. The cost of insurance is to be borne by the
borrower.
CASH FINANCE
1. Mark–up Agreement
2. Promissory Note (IB-12)
3. Letter of Pledge (IB-26)
4. Where collateral property is obtained, relevant documents

including IB-22 / IB-24 to be obtained.
DEMAND FINANCE
3. Legal opinion, property documents and non-encumbrance

certificate, where applicable including IB-22 / IB-24 /
IB-28 / IB-31 etc.
4. Balance Sheet/P&L Accounts for the past three years, for
appraisal and analysis. And projections for the period at
least up to final repayment/ expiry of limit.
Financing against Cash/Near Cash Collateral
1. Application for Finance
• 2. Letter of lien from depositor – self or 3rd party (IB-28 &

IB31). CF-19 to be used for earmarking of account.
___________________________________________________________________________
349
3. Depositor's signature of discharge on original deposit
receipt(s) / certificate(s) duly verified by issuing Bank /
Office and Branch.
4. Noting of MCB's lien on deposit application form and deposit
register (In case, the Deposit Receipts / Certificates were
issued by other Bank / Branch /Saving Centre, written
confirmation should be obtained from the branch).
5. 3rd Party deposit:
Letter to be sent by branch to 3rd party confirming that their
deposit has been placed under Bank's lien against financing
to the customer.
If 3rd party is limited company / non-profit organization,
verification that their memorandum by laws for trust deed
permits so.
6. Debit authority in case of lien over deposits/letter of
authority for encashment/redemption of the pledged
certificates without referring to the borrower, in case the
borrower fails to adjust the finance.
PAYMENT AGAINST DOCUMENTS (PAD)
1. Import Bills – Sight LC and shipping documents
2. Agreement with Bank for purchase of Shipping Documents

(IB8)
3. Other import documents
INLAND BILLS PURCHASED
1. Inland Bills – Letter of Credit (original)
2. Other documents as per L/C (invoice / packing list / indent

/ order form etc.) & transport documents.
3. Letter of Buy-Back-cum-Indemnity (IB-9)
6. Agreement for discounting / purchase of Bills (IB-20)
FINANCE AGAINST IMPORTED MERCHANDISE (FIM)
1. Letter of Indemnity for clearance of consignment (IB-8)
2. Letter of Pledge (IB-26)
3. Letter of Request from the importer
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350
4. Bill of Exchange duly accepted by customer in the case of
Usance L/C
5. Markup Agreement
6. Demand Promissory note (IB-12)
FINANCE AGAINST TRUST RECEIPTS (FTR)
1. Bill of Exchange duly accepted by the party
2. Letter of Trust (IB-27)
3. Collateral security & documentation thereof if any
4. Invoice.
5. Packing List, wherever necessary
6. Personal Guarantees of Directors (IB-29) in case of limited

cos.
7. Letter of Request from the customer
8. Demand Promissory Note (IB-12)
9. Markup Agreement
FINANCE AGAINST FOREIGN BILLS (FAFB) – SIGHT / DA

BASIS
1. D.P. Note (IB-12)
2. Markup Agreement
3. Duly accepted Sanction Advice / FAL from customer
4. Usual Security documents as per sanctioned limit
5. Personal guarantees of Directors, wherever necessary
FOREIGN BILLS PURCHASED / NEGOTIATED UNDER L/C
1. Original authenticated through L/C or Telex / Mail / SWIFT

(full text) as per UCP
2. Documents of Title to Goods (Bill of Lading / Airway Bill etc.)
___________________________________________________________________________
351
3. Bill of Exchange / Draft duly stamped (where required)
4. Commercial Invoices
5. Consular Invoice (where required)
6. Certificate of Origin as per terms of L/C
7. Packing List (where required)
8. Insurance Policy (in case of CIF Shipment)
11. Any other document as per L/C
FINANCE AGAINST PACKING CREDIT (FAPC)
1. Letter of Request
2. Letter of Hypothecation / Pledge of Stock (IB-25A / IB-26)
3. Original Copy of Irrevocable Letter of Credit or firm order

duly attested by exporter under Bank’s Lien.
4. Usual Documents as per sanctioned limit (copy of Resolution
in case of Limited Company, Partnership Deed and Partners
undertaking in case of Partnership Firm).
5. Markup Agreement
FINANCE AGAINST GOVERNMENT COMMODITY OPERATIONS

–WHEAT
1. Agriculture Finance Agreement (IB-4)
2. Letter of Hypothecation (IB-25A)
3. Photo copy of Government Guarantee [original is held at

CRRS, PO]
4. Authorization to negotiate Promissory. Note / Bills to SBP in
case of need. (Annexure –III)
5. Promissory note (IB-12)
6. Stock Report
___________________________________________________________________________
352
AGRICULTURE FINANCE
1. Application Form MF-5, bearing signature of the Applicant,

Guarantor and Witnesses (where required) duly
verified/admitted by the Branch Manager.
2. Duly stamped Demand Promissory Note (IB-12) letter of
markup Agreement / Undertaking cum-Guarantee (IB-7 or
as may be amended/bifurcated) and IB-29 (where applicable)
duly signed by borrowers / guarantors / witnesses.
3. Bank charge is on the agriculture land through Pass Book
System by the Revenue Authorities and a charge creation
certificate schedule - II is to be obtained. OR Mortgage of
property rural/urban &/or earmarking of deposits, lien on
DSC/SSC/Regular income certificates/other financial
instruments as applicable.
4. In case of finance against mortgage of land through Pass
Book to the extent of 80% of PIU value or 50% of forced sale
value of agriculture land. Finances up to PKR 100,000/ are
allowed against two guarantees, certified copy of Khasra
Girdawari /Fard Jamabandi Form VII and VIIA Certificate of
Bonafide to be held.
5. Valuation of rural/urban property with 50% margin on
forced sale value.
6. Earmarking of deposits, lien on DSC/ SSC, Regular income
certificates and other financial instruments with 25%
margin.
7. Registration of Tractor/vehicle etc in joint name of Bank &

Borrower (where applicable)
8. Copy of Computerized National Identity Card & National Tax
Number (if any)
TERM FINANCE /INDUSTRIAL CREDIT
1. Credit report on the manufacturers of machinery from their

bankers (it should be comprehensive and of recent date)
2. Request to Circle Office to depute technical/ professional
staff of Bank to carry out an inspection report on the
manufacturer.
3. The inspection report must contain essential information on
their manufacturing capability of the machinery involved,
adequacy of technical personnel, know how, their design
facilities and the manufacturers' previous experience.
Reference from previous users of machinery and equipment
manufactured and supplied by the same manufacturers may
be called. Such references are often of considerable value.
4. Comprehensive credit report on the sponsors of the project.
5. Credit Proposal
6. Quotations (at least three for every item).
8. Feasibility report/write-up on the project feasibility, where

required
___________________________________________________________________________
353
9. Legal opinion, property documents and non-encumbrance
certificate, where applicable
10. Valuation Certificate/Survey Report, where applicable.
11. Balance Sheet/P & L Accounts for the past three years, for
appraisal and analysis
FOREIGN CURRENCY IMPORT FINANCE
Following documents will be obtained from the customer :
• Promissory Note in US Dollars, Letter of Continuity and

Letter of Lien & Set-off.
• Agreement for financing on mark-up basis in US Dollar
(incorporating authority from customer, in favor of bank, to
raise the US Dollar from any source it deems fit (including
inter-bank market) to adjust the loan with mark-up and also
the fact that the customer would be liable to reimburse the
bank from its own sources, the rupee equivalent of the US
Dollar purchased to settle the loan plus mark-up plus all
incidental charges as well).
• Letter of Hypothecation / Letter of Pledge / Trust Receipt –
amounts to be mentioned in US Dollar.
• Usual Documents as per Sanctioned Limit.
LOAN SECURED BY SHARES
• Mark-up Agreement
• Letter of Lien on Marketable Securities (IB-28).
• Demand Promissory Note (IB-12).
• Agreement for Sale and Buy Back of Marketable Securities

(IB-31).
• Pledge of shares in marketable lots as per list of eligible
shares issued by CRMD
• Appropriate margins have been kept as per bank’s policy
a. Third party Mandate (where applicable)
• Shares electronically pledged in bank’s favor
• IB 28A for third party shares.
FOREIGN CURRENCY EXPORT FINANCING
• Request for Loan against valid export L/C or Firm Contract.

___________________________________________________________________________
354
• Agreement for financing on mark-up basis (incorporating
authority from customer, in favor of bank, to raise the US
Dollar from any source it deems fit to adjust the loan with
mark-up in case of non-realization of export proceeds and
also the fact that the customer would be liable to reimburse
the bank from its own sources, the rupee equivalent of the
US Dollar purchased to settle the loan plus mark-up plus all
• Letter of Hypothecation / Letter of Pledge – amounts to be
mentioned in US Dollar.
• Letter of Lien on Export bills.
• Accepted offer letter of Facility (One time) incorporating

acceptance from Customer that US $ proceeds of the
Finance to be immediately surrendered to Bank against Pak
Rupees at T.T. Buying rate and undertaking from Customer
to adjust the excess amount if due to adverse fluctuation in
exchange rate, the total exposure exceeds the aggregate limit
sanctioned in favor of the party.
FOREIGN CURRENCY BILLS DISCOUNTING
Following documents will be obtained from the customer :
• Request for Finance against valid export L/C.

• Agreement for financing on mark-up basis (incorporating
authority from customer, in favor of bank, to raise the US
Dollar from any source it deems fit to adjust the loan with
mark-up in case of non-realization of export proceeds and
also the fact that the customer would be liable to reimburse
the bank from its own sources, the rupee equivalent of the
US Dollar purchased to settle the loan plus mark-up plus all
• Accepted offer letter of Facility (One time) incorporating

acceptance from Customer that US $ proceeds of the
Finance to be immediately surrendered to Bank against Pak
Rupees at T.T. Buying rate and undertaking from Customer
to adjust the excess amount if due to adverse fluctuation in
exchange rate, the total exposure exceeds the aggregate limit
sanctioned in favor of the party.
GUARANTEE / PERFORMANCE BONDS, ETC.
• Undertaking
• Counter guarantee (IB-30) duly Stamped as applicable
• Collateral documentation, such as hypothecation letter of

mortgage agreement.
___________________________________________________________________________
355
CALCULATION OF MARGIN
This Appendix provides methods of calculating margin requirements for
1. Where margin is loaded on security (Hypothecation/ Pledge of stocks/

Receivable/ Fixed Asset/ Property) and Cash/ Near Cash Collateral)
Where margin is loaded on security, following formula shall be used to calculate the
amount of facility to be allowed against a specific security:
Facility (exposure) Amount in case Security Value X Margin (As per Approval)
of a specific security = 100
Example
If a loan is secured against the security of commercial property with FSV of PKR 100M
with margin of 30% on FSV, maximum finance which can be allowed shall be
calculated as:
Facility Amount = PKR 100M X 30

100
Facility Amount = PKR 70M
2. Margin requirement in case of prime/ secondary collateral (Hypothecation/

Pledge of stocks/ Receivable/Fixed Asset/ Property) and Cash/ Near Cash
Collateral, where margin is on facility:
Situation 1
If a loan of Rs.100M is required to be disbursed at 25% Margin, the value of required

Prime/ secondary Collateral shall be calculated using the following formula
Prime/ Secondary Collateral required Loan Amount X 100

(value) = (100 – Margin)
Prime/ Secondary Collateral required 100 X 100

(value) = (100 – 25)
Prime/ Secondary Collateral required PKR 133.333 Million

(value) =
Situation 2)
Where Prime Collateral offered is Pledge of stocks. In all such cases Secondary
Collateral requirement will be as follows
Example
Pledge Based Limit/ Loan Amount = PKR 150 M

Collateral Coverage Required = 25 %
___________________________________________________________________________
356
Calculation of Requirement of Secondary Collateral in shape of property/ Fixed Assets
Secondary Collateral required Loan Amount X Collateral Coverage

(value) = 100
Secondary Collateral required 150 X 25

(value) = 100
Secondary Collateral required PKR 37.5 Million

(value) =
3. Margin requirement in case of Non-Fund based financing
In case of non-fund based financing, the margin amount is calculated using following
formula:
Margin Amount in case of Non- Non-Fund Exposure X Margin (As per Approval)
Fund Exposure = 100
Letter of Credit (L/Cs): In case of L/Cs, such margin is usually in the shape of cash
collateral and is usually held in “Margin Account” on which no return is payable by
bank. However, except for Regulatory Cash Margin requirement, banks on competitive
considerations may allow margin amount to be held under lien in customer’s deposit
account (current or other-wise or as term deposit receipts/certificates). Where, such
relaxation is allowed, it is always subject to the deposit of the Regulatory Cash Margin
requirement in the “Margin Account”. Further, it may be noted that in case of L/Cs, the
margin is in addition to lien on documents of the relevant L/Cs. In case of Usance L/C,
further additional collateral may also be stipulated to cover the exposure at
“acceptance” stage.
Bank Guarantees (BG): Coverage (often called Margin) in case of BG may be in the
shape of any tangible security acceptable to the bank. It may be fixed property or cash
collateral or any other tangible security as required by sanctioning authority. In case of
property, MV (FSV in case of commercial property) should at least be equal to
guarantee amount. In case of cash collateral, encashment value (net of Zakat and WHT,
where applicable), should at least be equal to guarantee amount.
___________________________________________________________________________
357
Precautions Regarding Pledge of Stocks
Since Pledged stocks becomes in possession of the bank, they require
additional precautions regarding storage of goods. Following measures shall be
exercised by the branches/field offices to have an effective control on pledged
stocks:-
1. Location of Godowns
i. It should be ensured that Godowns are situated at a suitable place where the
chances of forceful lifting, theft and robbery are minimal.
ii. Godowns must not be inside shops or the residential premises.
iii. Godowns must have direct and independent approach for safety as well as
movement of stocks.
iv. It should not have dual control or control through any other Godowns, which
is in the control of some other borrower or a third person.
2. Condition of Godowns
i. The construction / structure must be sound and must not have any such
openings
Which may facilities theft and pilferage etc.
ii. Doors of Godowns should be strong as may not be easily breakable.
iii. Roof should be strong, water-proof and sufficiently strong so as to protect
Godown
from rains and / or other weather effects. The plinth level should be sufficiently
high
so that it does not fall in the course of rain water out-flow.
iv. Godowns should be totally dry with sound and satisfactory flooring.
v. Disinfectants to kill germs and insects are used periodically. Complete safety of
stocks from effects of dampness, moisture and insects is ensured.
vi. It should be checked that required firefighting equipment have been installed in
the
Godowns.
3. Locks to be used for Godowns
i. Locks purchased by Bank itself to be used for Godowns where stocks are
pledged. Locks purchased and/or provided by borrowers should not be
accepted.
ii. Both original and duplicate keys should be held in safe custody with the
branch where Muccadums are not posted.
4. Display of Bank’s Name plate
It is very essential that bank’s name plate written in Bold Letters must be displayed
inside and out-side the Godowns where pledge stocks are kept and also on stocks
hypothecated to bank and lying in open.
5. Taking Charge of Godowns
A letter for taking over the Godown in the possession of bank must be obtained and
kept in bank’s record (as prescribed in Section 5.6). Muccadum on taking-over
charge of a Godown be required to submit detailed stock report and that of storage
___________________________________________________________________________
358
conditions. Where Godowns / premises are not owned by the borrower, a letter of
disclaimer should be obtained from owner for un-hindered access to Bank.
6. Stacking/ Storage of Stocks
i. It is to be checked that incoming and outgoing stocks are accurately recorded

in the Godown’s Register with required details and proper authentication.
ii. It should be ensured that stocks are stacked in a countable manner and Bin
Cards are attached to each lot.
iii. The stacking of stocks will be done in conformity with relative original invoice
and / or packing list as the case may be.
iv. At random test check of packed bales / bundles / bags will be made by
breaking / open few bales / bundles or bags. Where necessary, laboratory test
report may be obtained to assess the quality of stocks.
7. Procedure for Fumigation of Stock
In case fumigation of stocks is required, following procedure shall be adopted:
a. The borrower shall request the Bank in writing.

b. Branch Manager/ Incharge Advances, Relationship Manager / Unit Heads
(WBG / Islamic Banking) shall jointly approve the schedule of fumigation /
de-fumigation.
c. Branch Manager / Incharge Advances, Relationship Manager / Unit Heads
(WBG / Islamic Banking) will personally visit the site prior to fumigation to
check / count the pledged stocks and will maintain such record.
d. Fumigation will be allowed after Branch Manager / Incharge Advances,
Relationship Manager / Unit Heads (WBG / Islamic Banking) have checked
/ counted the stocks.
e. After fumigation, Branch Manager / Incharge Advances, Relationship
Manager / Unit Heads (WBG / Islamic Banking) shall prepare a certificate to
this effect as follows:
“We confirm that (No. of) bags of (Stock) are lying

in Godown No. ______________ in the owned / leased / rented (cross whichever is
not applicable) premises of M/s.
(customer), which have been fumigated on (Date) in our presence.
The stock will be de-fumigated on (Date).”
f. The above certificate will be jointly signed by bank officials, borrower and
muccadum.
g. A copy of such certificate shall be affixed at gate of the said godown. Another
copy will be forwarded to respective GM Audit for information.
h. The fumigated godown shall be locked under dual locks, keys of one lock will
remain with the bank officials and keys of second lock shall remain with
muccadum staff.
i. After de-fumigation lock of bank officials shall be removed.
j. Stocks under fumigation shall be reflected in the stock statement separately.
___________________________________________________________________________
359
8. Movement of Stock from one godown/premises to another premises/godown
All approvals of finance shall specifically mention the site (along with complete
address) where pledged stocks shall be stored. For movement of stock from the
approved godown/premises to other godown/premises, Branch will arrange
necessary approval from the concerned Regional Manager (for both CBBG and
WBG).
Stocks pledged with the bank shall not be moved out of the godown to any other
site for value addition / processing (husking, polishing, etc.), without obtaining
proper ‘Delivery Order’ from authorized official of the concerned branch. Stock
statement shall be prepared by muccadums before and after the pledged stocks are
sent for processing and will be held on record.
At the second premises / godown, concerned muccadum will ensure that the
moved stocks are added / shown in stock statement of the borrower. While stocks
are in transit, Trust Receipt (IB-27) shall be obtained from the borrower. Insurance
will be arranged for stock in transit and at the second premises at the borrower’s
cost.
9. Adjustment of Finance
At the time of full and final adjustment of the finance, it shall be the responsibility
of the branch officials to inform the muccadum in writing regarding adjustment of
the finance with copy to CRCD.
___________________________________________________________________________
360
STATEMENT OF STOCK POSITION
HYPOTHECATED GOODS
MCB Bank Ltd.
________________Branch
Date:_____________
Borrower's Name:____________________
We certify that the quality, quantity and rates of the stocks noted below and hypothecated to the Bank as security are true and that the
stocks are as under;
Where held Detail of Hypothecated Stocks Other Banks Outstanding Insurance Details
Location Owner of Description Quantity Unit Total Name of Outstanding Value of Amount Name of Policy Risks Expiry
the place Value Value Banks respective Insurer No. Covered
stocks
For Office/ Bank Use only: We further certify that we are observing the conditions and
warranties of insurance(s) which is/are valid and subsisting in full.
Total Value of Stocks: _________________________
Less Margin @ %: _________________________ Customer Signature: _________________
Drawing Power: _________________________ Name: _________________
Outstanding As of(_________): _________________________ Designation: _________________
Excess/ Less: _________________________
____________________________________________________________________________________________________________________
361
STOCK REPORT
MCB Bank Limited

_________________ Branch
Dear Sir,
We M/s. _______________________ submit herewith the under mentioned particulars of

stocks in our Godown No.__________ known as ____________________ situated
at________________________________________ held under your favor and our account under
lien & pledge in your name_____________________ (Branch name).
Balance *Rate per

Weight *Approximate
Description per last Goods Goods Balance Unit/
Measurement Value Rs.
of Goods Report Received Delivered on hand Cost/
per unit Million
(DTD) Purchase
*To be filled in by Bank Officials (Branch Manager / Relationship Manager)
Insured by us for Rs____________ for risks of _____________________________________.

Policy No. _______________________Expiry______________.
We declare that the above mentioned goods, produce or merchandise are either our
bona fide property or we have such an interest therein as to fully entitles us to
pledge with you the full extent to the Bank's loans advances to us charges and
encumbrances and have actually been stored by us . That our titles to the goods
are cleaned, undisputed and that on one except you, have any lien or charges over
them. We further guarantee that the above entries are correct, thoughtful and
accurate in all their details and specification and that we shall be responsible for
any defect, shortcoming and inaccuracies discovered at any time hereafter. That
no responsibility will lie with the bank or its Muccadum in respect of the quantity,
quality or condition on final outcome to the goods, produce and merchandise now
or hereafter to be pledged.
It shall be the responsibility of the borrower that goods produce & merchandise
from the times being pledge shall be in accordance with and conform to the
description and declaration of and made by the borrower in the schedule and /or
pledge letter. We shall further be responsible for any deterioration, damages or
___________________________________________________________________________
362
losses for the goods arising for any cause whatsoever. We certify that the above
stocks are fully insured by us all time.
_________________________________
Authorized Signatures (Borrower)
Certified that the goods mentioned in this stocks report are available at the above
customer’s premises in mixed condition/ quality/lots etc.
Weight/quality/measurement checked and confirm by us/me at the time of
received the delivery of all stocks. Bank's name board has been duly displayed. We
have not arranged any insurance for these goods. Please confirm receipt of
insurance policy from the customer.
(Muccadum)____________________
For Bank’s Use only:
Total Value ………………..…….Rs.______________

Less D/O ……………………..….Rs.______________
Less Margin @%......................Rs.______________
Drawing Power……………….....Rs.______________
Outstanding Liability……….....Rs.______________
Signatures
_________________________________________
(Branch Manager / Relationship Manager)
___________________________________________________________________________
363
Schedule of Inspection of Hypothecated and Pledged Stocks
A) Schedule of Inspection of Hypothecated Stocks for Commercial (CBBG)

and Islamic Banking (IB):
A HYPOTHECATED STOCK
PERIODICAL STOCK INSPECTION SCHEDULE FOR GOODS
OFFICIALS AT HYPOTHECATED
VARIOUS LEVELS IN FAVOUR OF MCB AGAINST LIMITS PRIMARILY COVERED BY STOCKS
RESPONSIBLE Over Rs.20.000M &

Upto Rs.20.000M Over Rs.50.000M
FOR Upto Rs.50.000M
INSPECTION
(1) (2) (3) (4)
1 Incharge of
Advances or Quarterly Monthly Monthly
Branch
Manager/ In case of fresh finance, In case of fresh finance,
Relationship In case of fresh finance, stock
stock must be inspected stock must be inspected
Manager IB must be inspected before
before allowing before allowing
allowing disbursement, &
disbursement, & thereafter disbursement, & thereafter
thereafter as per above.
as per above. as per above.
Regional
Manager CBBG/
2 General Manager
or Business
Head IBG
Once a Year
a) Regular: Half Yearly Quarterly
(From Rs.5M )
Once at the time of the
b) NPL: Once at the time of the Once at the time of the
relevant exposure being
(where classified relevant exposure being relevant exposure being
classified and
principal amount classified and subsequently classified and subsequently
subsequently on need
is upto Rs.50M) on need basis. on need basis.
basis.
General Manager
3 CBBG/ Head
IBG: On discretion
a) Regular Once a year. Half yearly

b) NPL: Once at the time of the Once at the time of the
(where classified relevant exposure being relevant exposure being
classified and
principal amount classified and subsequently classified and subsequently
subsequently on need
is above Rs.50M) on need basis. on need basis.
basis.
4 Audit & RAR

Group
Periodic or surprise as
Audit Periodic or surprise as Periodic or surprise as
prescribed by Group
i) Circle prescribed by Group Head- prescribed by Group Head-
Head-Audit/Audit
Chief Audit/Audit Manual. Audit/Audit Manual.
Manual.
Inspectio
ii)
n Team
___________________________________________________________________________
364
B) Schedule of Inspection of Pledged Stocks for

Commercial (CBBG) and Islamic Banking (IBG):
Other than Commodity Seasonal Financing:
B PLEDGED STOCK
PERIODICAL STOCK INSPECTION SCHEDULE FOR GOODS HYPOTHECATED
OFFICIALS AT IN FAVOUR OF MCB AGAINST LIMITS PRIMARILY COVERED BY STOCKS
VARIOUS LEVELS
Over Rs.20.000M &
Upto Rs.20.000M Over Rs.50.000M
RESPONSIBLE FOR Upto Rs.50.000M
INSPECTION
(1) (2) (3) (4)
1. Incharge of
Advances or Quarterly Monthly Monthly
Branch Manager/
Relationship In case of fresh finance, In case of fresh finance,
In case of fresh finance, stock
Manager IB stock must be inspected stock must be inspected
must be inspected before
before allowing before allowing
disbursement, & disbursement, & thereafter
thereafter as per above. as per above.
Regional Manager
Manager CBBG/
2. General Manager
or Business Head
IBG
Half yearly
a) Regular: Half Yearly Quarterly
(From Rs.5M )
b) Once at the time of the Once at the time of the
NPL:……………… relevant exposure being relevant exposure being
(where classified classified and classified and
classified and subsequently
principal amount subsequently on need subsequently on need
on need basis.
is upto Rs.50M) basis. basis.
General Manager
3.
CBBG/ Head IBG:
Once a year.
a) Regular: Half yearly Once in four months.
(From Rs.5M )
b) Once at the time of the Once at the time of the
NPL:……………… relevant exposure being relevant exposure being
(where classified classified and classified and
classified and subsequently
principal amount subsequently on need subsequently on need
on need basis.
is above Rs 50M) basis. basis.
4. Audit & RAR
Group Periodic or surprise as Periodic or surprise as
Periodic or surprise as
Audit Circle prescribed by Group prescribed by Group
i) prescribed by Group Head-
Chief Head-Audit/Audit Head-Audit/Audit
Inspection
Audit/Audit Manual.
ii) Manual. Manual.
Team
___________________________________________________________________________
365
Seasonal Agro Based Commodity Financing to:

a) Cotton Ginners b) Rice Mills c) Wheat [Flour Mills / Traders, etc.] d) Sugar Mills
B PLEDGED STOCK
OFFICIALS AT HYPOTHECATED
VARIOUS LEVELS IN FAVOUR OF MCB AGAINST LIMITS PRIMARILY COVERED BY
STOCKS
RESPONSIBLE FOR Upto Over Rs.20.000M &
Over Rs.50.000M
INSPECTION Rs.20.000M Upto Rs.50.000M
(1) (2) (3) (4)
1. Incharge of
Monthly Monthly Monthly
Advances or
Branch Manager/ In case of fresh In case of fresh
Relationship finance, stock finance, stock must be
Manager IB In case of fresh finance, stock
must be inspected inspected before
must be inspected before
before allowing allowing
disbursement, & disbursement, &
thereafter as per thereafter as per
above. above.
Regional Manager
Manager CBBG/
2.
General Manager or
Business Head IBG
Thrice in a
a) Regular: Quarterly Once in every 60 days.
season.
Once at the time
b) Once at the time of
of the relevant Once at the time of the
NPL:……………… the relevant exposure
exposure being relevant exposure being
(where classified being classified and
classified and classified and subsequently
principal amount subsequently on need
subsequently on on need basis.
is upto Rs.50M) basis.
need basis.
General Manager
3.
CBBG/ Head IBG:
Once in a season.
a) Regular: Once in a season. Twice in a season.
(From Rs.5M )
Once at the time
b) Once at the time of
of the relevant Once at the time of the
NPL:……………… the relevant exposure
exposure being relevant exposure being
(where classified being classified and
classified and classified and subsequently
principal amount subsequently on need
subsequently on on need basis.
is above Rs.50M) basis.
need basis.
4. Audit & RAR Periodic or
Group surprise as Periodic or surprise
Audit Circle Periodic or surprise as
i) prescribed by as prescribed by
Chief prescribed by Group Head-
Group Head- Group Head-
Inspection Audit/Audit Manual.
ii) Audit/Audit Audit/Audit Manual.
Team
Manual.
___________________________________________________________________________
366
C) Schedule of Inspection of Pledged / Hypothecated Stocks

for Corporate Banking Group:
PLEDGED/HYPOTHECATED IN FAVOUR OF MCB AGAINST LIMITS
OFFICIALS AT VARIOUS LEVELS
PRIMARILY COVERED BY STOCKS
RESPONSIBLE FOR INSPECTION
Upto Rs.250M Over Rs.250M
(1) (2) (3)
1. Relationship Managers Half Yearly Quarterly
In case of fresh finance, stock must be inspected before allowing

disbursement, & thereafter as per above.
2. Team Leaders Yearly Half Yearly
3. Corporate Heads a) Regular cases:… At their discretion, but must pay
supervisory visit to at least 5% of sites
once in a calendar year. However, where
approved limit is over Rs.500.000M, the
same must be inspected at least once in a
year/season. The visits must be
documented and record kept with the
record of stock inspections.
b) NPL:……………… Once at the time of the relevant exposure
(where classified principal being classified and subsequently on need
amount is Rs.100M or basis.
more)
5. Audit & RAR Group Periodic or surprise visits as prescribed by Head of Audit Group/Audit
1) Audit Circle Manual.
2) Inspection Team
NOTES: APPLICABLE TO COMMERCIAL, ISLAMIC AND CORPORATE BANKING GROUPS.

a. If any short-fall/irregularity is noted by Stock Inspecting Official, the report must be signed-off
by the next higher authority in the business group to signify having noted the position. A copy of
stock inspection report must be endorsed to the branch where the exposure is booked.
b. Sanctioning Authority (Group Head & above) may specify higher / lower frequency of visits in
AOF on case-to-case basis.
c. In case of Commercial Clients only, where bank’s exposure is under pledge arrangement and
account is watch listed owing to shortfall or servicing of principal / mark-up liabilities then
frequency of stocks inspection at the levels of Branch Manager & Regional Manager will be
monthly and at the level of General Manager will be quarterly, irrespective of amount of
exposure, till the account is regularized.
___________________________________________________________________________
367
MCB
Bank
Limited Credit Handbook
STOCK INSPECTION REPORT (FORMAT)

Name of Customer Location (Address) Name and Designation
of Inspecting Officer
Date of Inspection Date of last inspection
1 Short Particulars of the Limit / Outstanding secured by hypothecation over stocks/Book Debts
Type of Limit Limit Amount Outstanding

A)
B)
C)
D)
2 (a) Latest valuation of security by AMT ( Rs,000)

Customer prior to inspection date. Raw Material
Stocks as on (Date) Work in Process
i) A copy of the customer stock Finished Goods
statement to be attached. Total
Less Margin -I
(%)
(b) Book Debts (Where applicable) Book Debts
Less Margin - II
(%)
Total - (I + II) – A
(c) Short/Excess position of security A <Less> O/S (For consortium, please see Annexure 8.4)
3 (a) Do the premises in which goods Self-Owned / Rented

are stored belong to the customer
or are rented?
(b) If rented, has the rent been paid Yes / No / NA

up-to-date in accordance with the
terms of the lease?
(c) If rented does the branch hold

letter of disclaimer from owner.
4 (a) Was the security in order? Yes / No

(If No give details of why the security was not in order)
(b) What is the aging of the goods? Minimum : Months
Maximum : Months
___________________________________________________________________________
368
MCB
Bank
(c) Were stock Registers of the Yes / No
customer up-to-date?
(d) Does the stock register agree Yes / No

with stock list?
(e) Were storage conditions Yes / No If no, give details.

satisfactory?
(f) Was the Building in good Yes / No

condition?
(g) Were firefighting arrangements Yes / No

in evidence?
INSURANCE
5 (a) Expiry date
(b) Are any goods of a hazardous

nature stored on the premises?
(c) If so, state the nature of the

goods and if covered or allowed
by the Policy of insurance. If not
covered or allowed, what steps
did you take for their removal.
IF UNDER BANK'S LIEN
6 (a) Were MCB’s Name boards on the

property displayed?
(b) Were our padlocks in use?
7 Irregularities and / or any other item of

interest in connection with the security or
the premises where it is stored.
8 In case of a factory give No. of shifts and

whether they were fully operational
If factory is − Date of closure

closed give: − Reason for closure
− Expected date of
commencement of
business
___________________________________________________________________________
369
MCB
Bank
9 Signature of Inspecting Officer
Date (Within 7 days of Inspection date)
Name
Designation
Date
Seen by
Officer-in-charge
(Branch Manager)
Signature of Officer-in-charge
Copies to: Credit Risk Control / Advances Department
Branch Manager / Credit File
___________________________________________________________________________
370
MCB
Bank
Folio for "Outward" No Objection Certificates (NOCs)
Borrower Name: A/C. M/s.____________________
Branch (Custodian)/CRCD:_____________________________________
Nature of
Safe-In No. Favoring Reference No. Date Amount Full Description of Property Charged Approving Authority Initials
Charge
Folio for "Inward" No Objection Certificates (NOCs)
Borrower Name: A/C. M/s.____________________
Branch
(Custodian)/CRCD:_____________________________________
Nature of Status of Registration

Safe-In
No. Favoring Reference No. Date Amount Full Description of Property Charged Initials
Charge
Date Amount
____________________________________________________________________________________________________________________
371
Responsibility By
Legal Affairs/
Credit Responsibility Schedule Credit Wholesale Retail Legal
Risk Banking Banking Counsel
Control Group Group
I. Credit Approval (CA):
1 Business Unit will send Credit proposal along Business Business

with LAF (Loan Application form), BBFS, Unit Unit
and eCIB report to Credit Approval/ Review
Authority for comments.
CA/ RA
2 CA/ RA will review raise queries (if any) on
these documents Fresh, Renewal,
Enhancement, etc. case.
Credit limits expired/ expiring in next two
3 months shall be intimated to business units
through exception tickler as part of Unit CRC
Exception report (UER)
II. Facility Advising Letter (FAL)
1 Preparation of Draft of Facility Advising letter CRC

(FAL).
2 Review of Draft of Facility Advising Letter Business Business

and suggest any amendment in FAL. Unit Unit
3 Preparation of Final Facility Advising letter CRC

(FAL) and jointly signing off by CRC &
Business Unit
4 Arrange acceptance of FAL from client within Business Business

15 days. Unit Unit
5 Exception/Tickler regarding FAL generated CRC

but not received is intimated to Business Units
through UER.
___________________________________________________________________________
372
III. Preparation of Standard Documents (IB Forms)
1 Generate Request for preparation of Standard Business Business

Documents. Unit Unit
2 For Fresh /Changed Facilities:

Preparation of IB forms after receipt of duly
accepted Facility Advising Letter or request
from business to prepare documents. CRC
For Renewed Facilities:
Preparation of IB forms along with Facility
Advising Letter upon request from business to
prepare documents.
3 Arrange execution, the signature verification Business Business

(by lead Pencil) on Standard Documents. Unit/ Unit
(Marketing
(Signature Verification will be done by Through
Branch Operations mentioning IBS/ AS Branch
number) Operations)
4 Review of executed Standards Documents. CRC
5 Arrange removal of discrepancy in documents Business Business

with waiver/ Deferral/Document. Unit Unit
IV. Preparation and Review of Non-Standard Documents i.e. Syndicate Finance, JPPAs & Corporate
Guarantees etc:
1 Generate Request for preparation and review Business Business

of Non Standard Documents. Unit Unit
2 All drafts of non-standard documentation shall Legal

be prepared and review by Legal Affairs / Affairs /
bank’s approved legal counsel along with Legal
opinion on ranking of charge and obtainment Counsel
of NOC after reviewing of latest search report
prior to execution.
Preparation of Documents or issuance of
3 NOCs as per draft approved by Legal Affairs / CRC
bank’s approved legal counsel.
4 Arrange execution and signature verification Business Business

(by lead Pencil) on Non Standard Documents. Unit / Unit
(Marketing
(Signature Verification will be done by through
Branch Operations mentioning IBS/ AS Branch
number) Operations)
5 Review of executed Non Standards CRC

Documents.
6 Arrange Registration of documents with

SECP / other agencies (if required) through CRC
Legal Retainers / Outsource Agencies.
___________________________________________________________________________
373
7 Arrange to get executed documents/ NOC Business Business
from lead bank in Syndication Unit Unit
8 Arrange removal of discrepancy in documents Business Business

with waiver/ Deferral/Document. Unit Unit
V. Legal Opinion
1 Title/Property documentation to be reviewed Business Business

by LAD/ Legal Retainer/ legal counsel as per Unit Unit
policy and obtaining clear legal opinion.
2 Arrange Final Vetting of Security Documents. CRC
VI. Insurance:
1 Business Unit will arrange Insurance Policy Business Business

from the client and forward to CRC. Unit Unit
2 Review of Insurance Policy as per bank policy CRC
3 Arrange removal of discrepancy / waiver / Business Business

Deferral ----In case of discrepancy in Unit Unit
insurance.
Insurance Policies expired/expiring in next 2-
4 months will be intimated to Business Units CRC
through Exception/Tickler as a part of UER.
VII. Stock Reports (Hypothecation)
Business
1 Business Unit will arrange Stock Report from Unit / Business
client as per bank's policy and verify the (Marketing Unit
signatures. (Signature Verification will be through
done by Branch Operations) along with Branch
insurance and DP analysis Operations)
Review of Stock Report, verify Drawing
2 Power including consortium O/S with CRC
requisite margin.
In case of shortfall CRC advises business unit
3 to reduce the limit as per DP. CRC
In case of shortfall Business will Arrange

4 removal of discrepancy / waiver / Deferral and Business Business
post-facto approval. Unit Unit
After removal of discrepancy / waiver /
5 Deferral CRC will issue instructions for CRC
restoration of limit.
CRC will convey 30-days advance Tickler as
6 a part of UER for the stock reports/receivable CRC
statements. Missing stock reports/receivable
statements shall be intimated to Business
Units through Exception as a part of UER.
___________________________________________________________________________
374
VIII. Stock Reports (Pledge Stocks):
Receipt of Pledged Stock Report from

1 Muccadum and Disbursal request letter from Business Business
client. Unit/ Branch Unit
Operations
Rates for calculation of drawing power are
2 advised by CRC as per policy. Business Business
Unit/ Branch Unit
Operations
Preparation of Drawing Power Calculation
3 Sheet, its check and verification with Business
insurance amount (Insurance of pledge stock Unit/ Branch Business
to be maintained by business), checking of Operations Unit
cushion, and disbursement as per Drawing
Power.
Monthly statement on outstanding & stocks
4 with date of pledge, maturity & insurance as Business Business
per specimen to CRC. Unit/ Branch Unit
Operations
Delivery Orders for release of stocks are
5 issued by the business. Business Business
Unit/ Branch Unit
Operations
IX. Appointment/Site Allocation – Muccadum
1 Request for the arrangement for muccadum. Business Business

Unit Unit
2 Selection of Muccadum as per approved list, CRC

checking criteria for appointment and
appointment of muccadum thereon
3 Standard Muccadumage arrangement to be CRC

signed with each muccadum whose services
are being utilized, at the CRC Level.
4 CRC will process centralized payment of CRC

Muccadumage charges.
5 Maintenance of per party limits of muccadum. CRC
6 Business Unit will confirm/validate of Business Business

Muccadum payment. Unit/ Branch Unit
Operations
X. Stock Inspection
1 Stock Inspection & Preparation of Stock Business Business

Inspection Report as per Schedule given in Unit Unit
Credit Handbook.
Stock Inspection overdue/ due in next one
___________________________________________________________________________
375
2 Month shall be intimated to Business Units CRC
through Exception/Tickler as a part of UER.
XI. Collateral Management (Lodgment):
1 All collateral, including title documents, CRC

government’s securities, shares etc. shall be
maintained under dual custody of CRC in safe
/ fire proof cabinets.
Each borrowing customer shall have a

2 Security Documentation Folder with the
specified following sections
1. AOF/FAL
2. LAF/ BBFS/ eCIB Report
3. IB-Forms
4. Board Resolutions (in case of Ltd Co)
5. Legal Opinions/Vettings
6. Security/Title documents. CRC
7. Valuation Reports
8. Charge/Mortgage documents
9. Search Reports/Credit Reports.
10.Client Info.documents i.e, MOA, AOA,
Form-29.COI,COCB,Form-A (in case of
Ltd.Co) /Partnership Deed etc.
11. Misc Documents (Application for
Finance, BBFS, Credit Reports, any
other document etc.)
3 Credit Documentation Folder should be kept

in safe custody in good condition under dual
control, regularly updated / purged and CRC
replaced as required. A log to be kept to
monitor the withdrawal of each file.
4 Collateral Lodgment Receipt (CLR) will be CRC

issued for securities/ collateral.
Business Business
5 Business Unit will keep the Collateral Unit Unit
Lodgment Receipt as a proof.
6 Release partially or fully of collateral should CRC

be at Business Request and as per bank's
Policy.
XII. Searches, Valuation, Credit Report:
Generate Request for Search/ Valuation

1 Report. Business Business
Unit Unit
Arrange Search/ Valuation Report through
2 bank’s approved outsource vendors CRC
Valuations expired/expiring in next two
3 months shall be intimated to Business Units CRC
___________________________________________________________________________
376
through Exception/Tickler as part of UER.
4 Arrangement/preparation of Credit Reports on Business Business

the clients. Unit Unit
XIII. Documentation Review:
All credit accounts documentation shall be

1 checked for accurate completion at least once
a year (at Renewal) or before issuance of CRC
DAC and Detail Review Report (DRR) will
prepare.
XIV. Disbursement Authorization Certificate (DAC):
No new disbursements are allowed prior to

1 completion of documentation / compliance with Business Business
(approval) terms and conditions. Unit/ Branch Unit
Operations
Disbursement to be allowed after the issuance of
2 DAC/ Limit unblocking instructions by CRC. CRC
Business Unit will disburse limits after receipt of Business Business
3 DAC/Limit Unblocking Instructions from CRC. Unit/ Branch Unit
Operations
XV. Limit Block Instructions
1 If the documents are not in order or deferral is CRC

not provided, CRC will issue Limit Block
Instructions.
Business
2 Business Units will block limit in Symbols. Unit/ Branch Business
Operations Unit
XVI. Compliance with Covenants, Other Terms and Conditions, Credit Circulars / Policy:
Non Compliance/Compliance within due date

1 of Specific Terms & Conditions/Covenants CRC
shall be intimated to business units through
Exception/Tickler as a part of UER.
XVII. Collateral Appraisal:
Following guidelines to be followed for

1 various types of collateral; Mortgage property
/ real estate:
Updated valuation to be undertaken once

every three years from an independent (bank
approved) surveyor. CRC
Marking of Lien on pledged Govt. Securities
___________________________________________________________________________
377
(DSCs, SSCs, RICs etc.):
Valuation to be conducted as required
under each line of credit before annual review.
Source of information to be major newspapers
/ trade bulletins.
Drawing Power against collateral to be based
2 on valuation as above. CRC
XVIII. Consortium Bank Outstanding:
1 For all credits booked under consortium bank

arrangements, outstanding of other banks to Business Business
be obtained Quarterly on a best effort basis Unit Unit
(Except as required by PR 12 that is
mandatory and will be required on monthly
basis).
2 Calculation of DP from consolidated stock

reports for facilities secured by way of
hypothecation of inventories / receivables. CRC
XIX. Limit/ Outstanding Monitoring:
1 After implementation of a CRC system, CRC

Monitor on a daily basis, Limit/ outstanding
on all borrowing relationships.
2 After implementation of a CRC system, CRC

Monitor, on a daily basis, all temporary
overdrafts / excesses.
XX. Maintenance of Other Documents:
1 Request for issuance of NOC to be generated Business Business

by business unit after obtaining approval from Unit Unit
competent authority.
2 Issuance of NOC to other banks. CRC
3 Expired/Expiring Deferral of Document cases CRC

shall be intimated to business Units through
Exception/Deferral as a part of UER.
XXI. Financing against Shares in Stock Exchange:
1 Generation of request for pledge of shares. Business Business

Unit / Unit
Marketing
through
Branch
Operations
Auto updating of shares in CMRMM by CRC
2 merging file in CMRMM from CDC.
___________________________________________________________________________
378
.Calculation of DP and Limit in CMRMM. CRC
3
4 Daily monitoring of Shares with CRC
outstanding/market price, reporting thereon.
XXII. Credit Reporting:
Unit Exception Report:

Any exception to the guidelines (detailed
above), in the following areas, must be
reported in the Unit (Branch) Exception
Report.
-Expired Credits.
- Commitment/outstanding monitoring
(including excesses over drawing power)
-Stock/receivable reports.
-Inspections
-insurance
-Facility Advising Letters.
-Searches.
- Compliance with covenants / other terms and CRC

conditions, credit policies, annual term loan
reviews.
- Documentation (includes – Names of

persons signing the document (including
witnesses) clearly identified by writing their
names in pencil below the signature on the
documents.)
-Line utilization/disbursement authority.

-Legal review of documentation.
-Collateral control.
-Running finance rollover.
-Registration of charge.
-Unit exception report to be prepared to be

sent to Business Units, weekly for WBG and
Islamic, fortnightly for CBBG
2 Nil report is required. CRC
3 Proceed to remove reported discrepancies Business Business

Unit Unit
___________________________________________________________________________
379
SECURITY DOCUMENTATION FILE TO BE HELD BY CRCD
Following documents should be held in security documentation folder
1. APPROVAL OF FINANCE & FACILITY ADVISING LETTER:

i. Approval of finance
ii. Facility Advising Letter
iii. Letter regarding Temporary Extension in Validity of Expiry
iv. Others (including emails if approval provided in electronic form)
2. APPLICATION OF FINANCE, BBF, eCIB REPORT

i. Application of Finance
ii. BBFS
iii. eCIB Report
iv. Others
3. IB FORMS
i. IB-6, 6(A), 6(K), 12, 24, 25 (A), 26, 31
ii. CF-13, 19
iii. Others
4. BOARD RESOLUTION FOR LIMITED LIABILITY COMPANY

i. Board Resolution
ii. Minutes of Meetings
iii. Others
5. LEGAL OPINION/VETTING
i. Legal Opinion on Property Documents
ii. Legal Vetting on Property Documents
iii. Legal Opinion any Specific Point i.e. Charge on Assets, NOC for Pari
Passu Charge, Draft of any Non Standard Documents/ Agreement.
iv. Any other correspondence with Legal Affairs Division/ Retainer.
v. Vetting Certificate
vi. Others
6. TITLE & SECURITY DOCUMENTS

i. Sale Deed, Gift Deed, Transfer Letter, Conveyance Deed, Allotment Letter,
Exchange Deed, Surrender Deed, Rectification Deed, Agreement to Sell,
Affidavit
ii. PT-1
iii. Clearance Certificate
iv. Extracts form Record of Rights/ Fard (in case of Properties falling under
Revenue Record)
v. Goshwara-e-Malkiat
vi. Nakal Intikal
vii. Aks Shajra
___________________________________________________________________________
380
viii. Shajra Qila Bandi
ix. Aks-e-Masawi
x. Tatimma (For subdivision of Khasra No.)
xi. Khasra Amarti
xii. Succession Certificate
xiii. Certificate of Death
xiv. Non Encumbrance Certificate
xv. Form B/Sanctioned Plan/ Site Plan/ Demarcation Plan/Plan of Society &
Plaza/Part Plan
xvi. Membership Certificate from Societies
xvii. General Power of Attorney
xviii. Completion Certificate
xix. Letter of Possession
xx. Deposit Certificates/ Shares duly Discharged by Depositor verified by
Issuing Office
xxi. Others
7. VALUATION REPORT
i. By Independent Surveyors on our Approved Panel
ii. By Branch Manager
iii. Others
8. CHARGE/MORTGAGE DOCUMENTS
i. Memorandum of Deposit of Title Deed/ IB-24
ii. Agreement to Create Registered Mortgage
iii. Mortgage Deed/ Redemption Deed
iv. Irrevocable General Power of Attorney/ Revocation thereof (if arranged)
v. Mortgage Mutation on Fard/ Nakal Intikal/ Intimation to Societies for
Placing Charge on Property in Record/ PT 1
vi. Permission to Mortgage
vii. Form 10, 16 along with charge creating Documents for Charge on:
• Stocks
• Receivables/Book Debts
• Machinery
• Land & Building
viii. Certificate of Registration of Charge/Acknowledgement of Filing
ix. Form 17 for Satisfaction of Charge
x. Others
9. SEARCH REPORTS
i. Search Report
ii. Others
10. CLIENT INFO DOCUMENTS

i. Certificate of Incorporation
ii. Memorandum & Article of Association
iii. Certificate of Commencement of Business
iv. List of Directors/Particulars of Directors/Form 29
v. Form A
___________________________________________________________________________
381
vi. Partnership Deed
vii. Others
11. MISC. DOCUMENTS

i. CNIC
ii. Request Letter for Noting of Charge on Properties/ Deposit Certificates &
other Securities/ Removal thereof
iii. Encashment Letter/Third Party Confirmation
iv. Letter regarding Pledge of DSCs’
v. Detail of Deposit Certificates
vi. Bank Guarantees (Expired & Photocopies of Existing Guarantees)
vii. Any Correspondence/ Acknowledgement with Housing Societies/
viii. Certificate Issuing Offices/ Borrower
ix. Letter of Access to Go downs/ Business Place
x. Others
12. INSURANCE
i. Insurance Policy
ii. Premium Paid Receipt
iii. Endorsements
iv. Insurance Cover Notes (optional)
___________________________________________________________________________
382
INSURANCE POLICIES / RISKS

A- Fire Policy Our Comments
1. It is compulsory to obtain a Fire Policy in
It is one of the Main Insurance Policy all cases because it is a Main Policy
document. Fire Policy provides insurance without which no extension (RSD,
coverage to the Property insured if destroyed Terrorism, MD Etc.) shall be available.
or damaged by Fire and / or Lightning. The However, for goods/assets for which the
Insurance Company may pay at market value peril is low, the insurance charges are low
at the time of destruction / damage or at its & vice versa.
option reinstate / replace such property or 2. Fire Policy also provides coverage to fire
any part thereof. Such compensation not to caused by lightning.
exceed sum insured. Other risks are covered 3. Loss caused by spontaneous fire is not
by extensions to this main policy and as such covered under fire policy unless an
its terms & conditions apply to extensions as extension to this effect is obtained. So it is
well, unless varied other-wise. prudent to obtain a Fire Policy with
extension to cover loss caused by
spontaneous fire, where such risk exist
(e.g. Cotton / Gasoline etc.).
Recommendations
i) Baled Cotton.
ii) Phutti / Loose Cotton.
iii) Yarn / Cloth / Fabrics / Plastic Materials /
Other flammable Item / Finished Goods (on
case to case basis) / Grains.
iv) Other items where Fire Risk is relevant.
v) Coverage of stocks in process to be
obtained, wherever applicable.
B- Burglary Our Comments

1. It is compulsory to obtain this main policy
It covers loss or damage by theft following in case of hypothecation / pledge of stocks.
upon or followed by Burglary or 2. The deployment, of round the clock
Housebreaking accompanied by actual forcible Chowkidar / guard is essential with the
and violent breaking into or out of the standard condition that Armed Chowkidar
premises herein described provided the be posted by insured during every night
premises are guarded by armed Chowkidars from 9.00 p.m. to 6.00 a.m.
every night from 9 p.m. to 6 a.m. 3. It covers loss consequent to actual forceful
and violent breaking into or out of the
The policy does not cover loss or damage due premises and do not provide coverage to
to any theft or to any attempt by any member such loss caused by any member of
of the insured’s family, business staff, insured family or employee or any other
domestic servants, or any persons lawfully on person lawful on the premises.
the premises whether such person or persons 4. The policy provides coverage to only those
are concerned as principals or accessories. theft which are followed by / consequent to
burglary.
Recommendations
i) This should be obtained in case all
moveable goods or unmovable / assets,
which can be easily removed.
ii) In case of cotton / sugar / other bulky
stocks, where banks approved Muccadums
are posted & communication system is
___________________________________________________________________________
383
appropriate, the policy may be obtained on
1st loss basis (i.e. goods whose lifting is
possible within a night / 8 hours, subject
to the condition that the same is at least
10% of goods under banks pledge / lien.
1- Riot and Strike endorsement Our Comments

1. RSD extension must be obtained with Main
Riot and Strike Endorsement is usually an Policy where the stocks / goods are stored
extension of fire Policy and extends the in godowns situated in mill / factory
coverage to loss of damage directly caused by :- premises / other places where such risk
1. Disturbance of the public peace (whether exists.
in connection with strike or lock-out or 2. In case of hypothecation too RSD extension
not) not being an occurrence mentioned in must be obtained.
Condition 6 of the Special Conditions 3. It must be noted that any loss caused due
hereof. to war, hostilities, civil commotion,
2. The action of any lawful constituted terrorism and other causes listed in special
authority in suppressing or attempting to conditions of the standard RSD extension
suppress any such disturbance or in are not covered in this policy.
minimizing the consequences of any such
disturbance or in preventing or attempting
to prevent any such act or in minimizing
the consequences of any such act..
3. The willful act of any striker or locked-out
worker done in furtherance of a strike or
in resistance to a lock-out.
SPECIAL CONDITIONS
Following standard conditions of the Fire Recommendations
(Main) policy shall be substituted with the i) Stocks stored in Factory Premises / Large
following :- Trading Houses.
CONDITION 5 ii) Disturbed area / Shopping entries or period
i) This insurance does not cover : of political unrest.
a) Loss of earnings, loss by delay, loss of iii) All other situation, where chances of loss
market or other consequential or due to such peril is significant.
indirect loss or damage of any kind or
description whatsoever.
b) Loss or damage resulting from total or
partial cessation of work or the
retarding of interruption or cessation
of any process or operation.
c) Loss or damage occasioned by
permanent or temporary
dispossession resulting from
confiscation, commandeering or
requisition by any lawfully constituted
authority including physical damage.
d) Loss or damage occasioned by
permanent or temporary
dispossession of any building
resulting from the unlawful
occupation by any person of such
building including physical damage.
e) Loss or damage, directly or indirectly
caused by or arising from or in
___________________________________________________________________________
384
consequence of or contributed to by
nuclear weapons material.
By ionizing radiations or contamination by
radioactivity from any nuclear fuel or from any
nuclear waste from the combustions of nuclear
fuel (any self-sustaining process of nuclear
fission).
CONDITION 6
This insurance does not cover any loss or
damage occasioned by or through or in
consequence, directly or indirectly, of any of
the following occurrences, namely :-
a) War, invasion, act of foreign enemy,
hostilities or warlike operations (whether
war be declared or not), civil war.
b) Mutiny, civil commotion assuming the
proportions of or amounting to a popular
rising military rising, insurrection,
rebellion, revolution, military or usurped
power.
c) Acts of terrorism committed by a person or
persons acting on behalf of or in
connection with any organization.
For the purpose of this Condition, “terrorism”
means the use of violence for political ends and
includes any use of violence for the purpose of
putting the public or any section of the public
in fear.
2- Malicious damage endorsement Our Comments

1. This extension must be obtained, unless it
This is an extension of RSD and extends can be ruled out without any doubt.
coverage to loss of or damage to the property 2. In case of any finance extended to traders /
insured directly caused by the malicious act of shopkeepers obtaining of MD extension is
any person (whether or not such act is essential.
committed in the course of a disturbance of the 3. Any property mortgaged in Bank’s favor
public peace) not due to war / invasion / by must be covered under this extension.
foreign enemy / Mutiny / Civil commotion /
Terrorism etc. as act amounting to or Recommendations
committed in connection mentioned in Special i) Please see our comments 1, 2 & 3.
Condition 6 of Riot and Strike Endorsement. ii) Areas where feudal / competitive rivalry is
Does not cover damage by fire or explosion significant.
nor for any loss or damage arising out of or iii) Liquid cargo due to leakage etc. is
in the course of burglary, housebreaking, significant should be necessary obtained in
theft or larceny or any attempt thereat or case of flammable items or liquid cargo
caused by any person taking part therein. stored in drums / less durable tanks or
All conditions and provisos of Riot and Strike where security system is inadequate.
Endorsement apply.
___________________________________________________________________________
385
3- Terrorism endorsement Our Comments
1. This extension is not available generally
Terrorism Endorsement is an extension of when risk is high e.g. at present. Keeping
RSD and extends coverage of the policy to loss this factor in view this may be waived.
of or damage to the property insured by 2. It does not provide coverage to war,
explosion or otherwise directly caused by an hostilities & civil commotion etc.
act of terrorism committed by a person or
persons acting on behalf of or in connection Recommendations
with any organization. Please see our comment 1 & 2.
SPECIAL CONDITIONS
For the purpose of this extension but not
otherwise :-
I. “Terrorism” means the use of violence for
political ends and includes any use of
violence for the purpose of putting the
public or any section of the public in fear.
II. Special condition 6 of the said Riot and
Strike Endorsement shall read as follows
:-
“(6) This insurance does not cover any
loss or damage occasioned by through or
in consequence, directly or indirectly, of
any of the following occurrences, namely:
a) War, invasion, act of foreign enemy,
hostilities or warlike operations (whether
war be declared or not), civil war.
b) Mutiny, civil commotion assuming the
proportions of or amounting to a popular
rising military rising, insurrection,
rebellion, revolution, military or usurped
power.
___________________________________________________________________________
386
4- Standard Explosion endorsement Our Comments
1) This policy should be used where
Standard Explosion Endorsement is an probability of explosion is significant or in
extension of Fire (Main) Policy & covers loss of those industries where obtaining of
or damage to the property insured by fire or coverage for such peril is customary.
otherwise directly caused by explosion, (except 2) Please note that loss of or damage to
insofar as Condition No. 7(h) of Standard Fire boilers, economizers, or other vessels,
Policy is hereby expressly varied) loss or machinery or apparatus in which pressure
damage occasioned by or through or in is used or their contents resulting from
consequence, directly, of acts of terrorism (use their explosion is not covered.
of violence for political ends and includes any
use of violence for the purpose of putting the Recommendations
public or any section of the public in fear.) i) Please refer item 1 & 2 of our comments.
committed by a person or persons acting on ii) More relevant to storage of flammable
behalf of or in connection with any liquid or liquids stored in premises.
organization.
In case of fire insurance coverage, the

Company shall be liable only pro rata
with such other fire insurance for any
loss or damage by explosion whether or
not such other fire insurance be extended
to cover loss or damage by explosion.
___________________________________________________________________________
387
5- Earthquake endorsement & Clauses
EARTHQUAKE FIRE COVER Our Comments

This covers loss or damage by fire to any of Please not that this endorsement provide
the property insured by this policy occasioned coverage to loss or damage by fire or
by or through or in consequence of earthquake shock or consequence thereof.
earthquake.
Recommendations
EARTHQUAKE SHOCK RISK i) Please refer our comment.
This covers loss or damage (including loss or ii) Area falling in Earthquake zones.
damage by fire) to any of the property insured iii) Period during which the adjacent areas are
by this policy occasioned by or through or in hit by earthquake or there are scientific
consequence of earthquake.” reports about possible of earthquake.
Provided always that all the conditions of this

policy shall apply (except in so far as they may
be hereby expressly varied) and that any
reference therein to loss or damage by fire
shall be deemed to apply also to loss or
damage directly caused by any of the perils
which this insurance extends to include by
virtue of this endorsement.
Each and every loss under the policy caused

by Earthquake (other than loss or damage by
Fire so caused) shall be subject to a
deductible of Rs.15,000/- (Not applicable to
goods and / or materials stored or lying in the
open).
6- Atmospheric Disturbance endorsement Our Comments

AD extend to include :- 1. Loss caused by normal rain or flood on a/c
LOSS OR DAMAGE directly caused by :- of normal water course or leakage from
A. Hail, Snow Wind, Hurricane, Cyclone, pipe/ tap etc are not covered under this
Tornado; or Typhoon, and / or, extension i.e. atmospheric disturbance
B. Rain, provided the building(s) in respect endorsement. Therefore, field must ensure
of which the claim made or containing the that the place, where the stocks are to be
property in respect of which the claim is pledged, is so safe that normal rain, or flow
made is so damaged by any of the perils or accumulation of water resulting from
specified in A supra as to admit rain normal rain can’t spoil or destroy it.
water to the interior of the said
building(s); and / or,
C. Flood, which shall mean :-
1. The overflowing or deviation from
their normal channels of either
natural or artificial water courses.
and
2. Any flow or accumulation of water on
the ground except when such flow or
accumulation be of water emitted
from any water supply main, tap,
pipe, valve or the like.
Provided nothing herein shall be deemed to
cover stocks and / or contents in open and /
or in open sided sheds and / or in open sided
___________________________________________________________________________
388
buildings, underground tanks in the open
containing solvents, fuel, oils, chemicals or
any other liquid.
Provided always that all the conditions of this
Policy shall apply (except in so far as they may
be hereby expressly varied) and that any
reference therein to loss or damage by fire
shall be deemed to apply also to loss or
damage directly caused by any of the perils
which this insurance extends to include by
virtue of the above mentioned clause.
No consequential loss or damage of any kind
or description, nor any loss or damage caused
by confiscation or willful destruction by
Government or any Municipal or Local
Authority is covered under this Policy.
It is understood and agreed that each and
every loss under the above mentioned perils
shall be subject to a deductible of
Rs.25,000/=.
___________________________________________________________________________
389
7- Aircraft Damage endorsement
Our Comments
This endorsement extend to include loss or 1. This extension is necessary if the property
damage to the property insured (by fire or mortgaged or stocks pledged or
otherwise) directly caused by Aircraft and hypothecated are in an area which is near
other aerial devices and / or articles dropped to an airport whether civil or of army
there from. Provided always that all the especially if stored in the direction of flying
conditions of the policy shall apply as if they course.
had been incorporated herein and for the 2. Clarification must also be obtained that the
purpose hereof any loss or damage as extension shall cover loss due to vibration
aforesaid shall be deemed to be loss or of Aircraft’s low flight over the premises.
damage by fire.
Recommendations
SPECIAL CONDITIONS Please refer our comments 1 & 2.
This insurance does not cover any loss or
damage caused by any Aircraft to which
permission to land has been extended by the
Insured / loss exceeding insured amount.
8- Impact Damage endorsement

Our Comments
Cover loss or damage to the Building & / or 1. This extension can be waived if the
its contents, gate, boundary wall due to property mortgaged / hypothecated /
impact by any road vehicle not belonging to or pledged in an area which is not near or
under the control of the insured. surrounded by road where traffic volume is
high.
2. It should be noted that any damage or loss
caused to property by impact of road
vehicle, belonging to or under the control of
the insured, is not covered under this
extension.
Recommendations
Applicable for stocks stored in area of high &
fast road traffic. Please refer item # 2 of our
comments.
___________________________________________________________________________
390
9- Bush Fire
Our Comments
It is hereby declared and agreed that loss or To be obtained where such risk is possible.
damage to the property insured under this
policy occasioned by or through or in Recommendations
consequence of the burning of forest, bust, Please refer our comments.
prairie pampas or jungle and the clearing of
lands by fire (except such clearing by or on
behalf of the insured) shall be deemed to be
loss or damage within the meaning of the
policy and condition # 7(i) of this policy shall
to the extent be modified accordingly.
Provided that if there shall be any other fire
insurance on the property insured under this
policy the company shall be liable only pro-
rata with such other Fire insurance for any
loss or damage as aforesaid whether or not
such other fire insurance be so extended.
10- Spontaneous Combustion Clause
Our Comments
It is hereby declared and agreed that To be obtained where the stock may catch fire
notwithstanding anything herein contained to due to its own combustion.
the contrary the insurance by (Items of) this
policy shall extend to include destruction or Recommendations
damage by fire only of or to insured property To be obtained on Cotton / stock which ignite
caused by its own spontaneous fermentation at low / less than atmospheric temperature.
heating of combustion.
Provided that all the conditions of the policy,

except as expressly varied herein, shall apply
as if they had been incorporated herein.
11- Electrical
Our Comments
CLAUSE ‘A’ Exonerates the insurance company from paying
This Company is expressly declared to be free on account of loss to insured machinery &
from liability for loss of or damage to any apparatus etc. on account of / or overrunning,
electrical machine, apparatus, fixture or excessive pressure, short circuiting, arcing, self-
fitting (including electric fans, electric house- heading or leakage of electricity, but any loss to
hold or domestic appliances, wireless sets and other machinery covered under policy due fire
radios) or to any portion of the electrical created on account of aforesaid reason shall be
installation, arising from or occasioned by compensated.
overrunning, excessive pressure, short
circuiting, arcing, self-heating or leakage of Recommendations
electricity, from whatever cause (lightning, These coverage should be covered, where
included); provided that this exemption shall chance of such loss is significant. Shall not be
apply only to the particular electrical required for building.
machine, apparatus, fixture, fitting or portion
Our Comments
of the electrical installation so affected and
Provides coverage to machinery on account of
not to other machines, apparatus, fixtures,
fitting or portion of the electrical installation
aforesaid electrical reasons, if the same is a
which may be destroyed or damaged by fireconsequence of Fire or Lightning.
set-up. Recommendations
These risks should be covered, where chance of
CLAUSE ‘B’ such loss is significant. Shall not be required
Loss or damage by fire to the electrical for building.
___________________________________________________________________________
391
appliance and installations insured by the
item of this policy arising from or occasioned
by overrunning excessive pressure, short
circuiting arcing self-heating or leakage of
electricity, from whatever cause (lightning
included), is covered subject to the terms and
conditions of this policy but it is expressly
understood that no liability exists under this
policy for loss or damage to any electrical
machine, apparatus, fixture or fitting or to
any portion of the electrical installation unless
caused by fire or lightning.
For details Branches are advised to study copy of standard Insurance policy of
individual cases. Please note that Fire & Burglary Policy are Main Policies and as
such extensions shall be of either of the two main policies. Thus conditions /
exclusions / applicable to the Main Insurance Policies are also applicable to
extensions, unless varied. Branches / Field Offices should obtain detailed policy of
standard & insurance policies. Besides, aforesaid it is essential that branches are
also aware of Warranties / Declarations / Others clauses, so that branches ensure
that goods are stored in-accordance with the conditions laid down in these
warranties / documents.
1- Form ‘K’ - (Building Warranties – 2- Cotton Mill Warranties - (General /

Construction type / Silent Risks / Night Godowns / Open – Not allowed)
Works / Electric Light)
3- Bank Mortgage clause 4- Automatic increase clause
5- Removal of debris clause 6- TPX–Warranties - (Agricultural Produce /
Commodities)
7- Declaration clause 8- Reinstatement clause
After going through aforesaid contents / Annexures, branches shall be better

equipped to asses themselves the pertinent risk(s) and should cover all risks
relevant to the assets / stocks under our lien. The content / comments /
recommendation of this announced provides general guidance & pertinent risks to
be covered to be decided on case to case basis keeping in view the ground realities.
___________________________________________________________________________
392
INSURANCE GRID
To further facilitate understanding of branches/field offices on the subject, Appendix I to

Chapter 5.4 provides details of perils for which insurance cover (other than marine insurance)
are generally available for assets held as security.
F B R&S MD T EFR ES AD Ar D ID E
Commodities
Under Pledge / √ √ √ √ Risk coverage should be taken keeping in
Hypothecation view nature, location and storage
conditions of the asset held as
security. Waiver of the risk covers ‘not
applicable’, if any, should be in place.
Plant & Machinery
Ginning Factories √ √ √ √
Spinning Factories √ √ √ √ √ √ √ √
Weaving Factories √ √ √ √ √ √ √ √
Flour Mills √ √ √ √ √ √ √ √
Sugar Mills √ √ √ √ √ √ √ √
Rice Mills √ √ √ √ √ √ √ √
Cigarette
Manufacturing √ √ √ √ √ √ √ √ √
Factories
Fertilizer Factories √ √ √ √ √ √ √ √ √
Beverage Factories √ √ √ √ √ √ √ √ √
Buildings
Residential √ √ √ Risk coverage should be taken keeping in
Factory Building √ √ √ view nature, location and storage
Commercial √ √ √ conditions of the asset held as
Building (Multi security. Waiver of the risk covers ‘not
Storey) applicable’, if any, should be in place.
F Fire Policy
B Burglary
R & S Riots and Strikes
MD Malicious Damage
T Terrorism
EFR Earthquake Fire Risk
ES Earthquake Shock
AD Atmospheric Disturbances
Ar D Aircraft Damage
ID Impact Damage
E Electrical
___________________________________________________________________________
393
DEFERABLE DOCUMENTS AND APPROVAL LEVEL
*In-house deferral (for CBBG clients only) can be availed once i.e. either at General Manager Level or
Business Head level, as per the requirement. Subsequent deferral shall be allowed as per deferral
approval matrix.
*In-House Maximum
Deferral Tenor* of
(for CBBG Deferral as per
SR clients only) Deferral
Document Conditions for allowing deferral
# Approval
GM BH
Authority Matrix
Time in days.
(i)
Insurance policy is not
available, however, Cover Note
and Premium Paid Receipt (PPR)
/ Letter from insurance
company (that premium has
been paid and policy is
effective), are in place.
30
X X
Companies with MCB CRR of 1
to 4
Insurance 15
1 X X
Policy Companies with MCB CRR of 5
to 7
No Deferral
X X
Companies with MCB CRR of 8
and above.
Maximum time allowed without deferral shall be 30 working days
from the date of Premium Paid Receipt.
(ii)
Insurance Risk covers have not
been obtained as per the 07 15 30
Approval of Finance.
This is requirement of
prudential regulations and
normally RM/ Branch should
make efforts to obtain this at X X 30
earliest after month end for
Monthly Stock
monitoring purposes.
Statement
along with
2 FOR WBG Corporate Customers
outstanding
only
with other
banks Few large corporate customers
furnish stock statements late X X 30 in case of
due to genuine reasons e.g. month end
presence of stocks at different
locations, multi bank
___________________________________________________________________________
394
environment etc that results in
inevitable delay on part of
borrower to compile 45 in case of
information. In that case X X Quarter End
deferral for longer period can be
considered.
Maximum time allowed without deferral is thirty 30 working days

after month end.
Charge
Registration
Certificate and
other related
issues (i.e. Acknowledgement of receipt is
3 15 30 15
missing in place.
certified true
copy of the
document /
legal vetting).
Only to be allowed if Cross

Cross Company
4 Corporate Guarantee is not 1st X X 15
Guarantee
way out.
(i)
As per policy, valuation is
required to be conducted after
every three years.
This relaxation to be allowed in

event of expiry of valuation 15 30 30
Valuation report after 3 years.
5 Report
(After 3 years) Fresh valuation report required
on initiation of finance is non-
deferrable
(ii)
The Valuation Report obtained
15 30 30
contains discrepancies.
Facility
Advising Letter Proper reason should be
duly accepted recorded e.g. differences over
6 X X 15
by the client markup rate or any term /
not received condition
back
Mortgage (i)
Mutation / This relaxation is being allowed
Noting of owing to time consumed by
7 Bank’s concerned authorities to record
Mortgage mortgage mutation/ noting of
charge in charge in their records.
record of Acknowledgement of filing of 15 30 60
___________________________________________________________________________
395
concerned mortgage documents with
Authority concerned authorities to be held
(Revenue/ before allowing the deferral
LDA/Excise, except where no such
etc.) acknowledgement is issued by
concerned authority.
All other legal documentation is
complete and clear legal opinion
except mortgage mutation is
held.
(ii)
PT-1 showing Bank Mortgage.
This requirement can be
Final Legal deferred subject to the condition
8 15 30 30
Clearance that all other formalities are
complete.
Stock
Inspection By
• Branch
Manager Reasons for not conducting
9 15 30 30
• Regional stock inspection should be
Manager documented.
• General
Manager
Deferral of the following
supporting documents may be
allowed only:
Property
10 a. Approved Site Plan 15 30 30
Documents
b. Completion Certificate
c. Aks Shajra
d. Demarcation of property
e. Previous Title Documents
In case of discrepancies in AoF,
Discrepant
matter should immediately be
11 Approval of 07 15 30
referred to relevant AoF issuing
Finance (AoF)
authority.
eCIB report contains
eCIB Report
discrepancies (data related
12 (with 30 60 60
issues). Rectification from SBP
discrepancies)
is pending / awaited.
a. Overdue mark-up
b. Overdue Bills (FIM, CF, TR,
Past Due Trade Bills) / Installment 07 15
13 30
Liabilities c. Approval for condonation of
mark-up in excess of TPMR
is pending.
a. Certified True Copies of
Ownership Mutation,
Miscellaneous Mortgage Mutation,
14 15 30 30
Documents Memorandum of
Association, Articles of
Association, Form-29 and
___________________________________________________________________________
396
/or Form-A.
b. Copy of CNIC of mortgager.
c. Copy of partnership deed.
d. Search Reports.
Sanctioning authority while
allowing deferral must be
satisfied that
1. Deferred Documents do not
fall under category 1
(Documents providing
Any other
15 evidence to legal claim) & 2 X X 30
document
(Documents required by
regulatory bodies)
2. Deferral will not expose
bank to any pecuniary risk
and bank’s security position
is not weakened.
* From Deferral approval date
___________________________________________________________________________
397
DOCUMENT DEFERRAL MEMO
MEMO TO:
DATE: _________
RE: DEFERRAL OF DOCUMENT (S)
UNIT:
1 Name of the
Borrower/Business group
2 C.P. NO. and Date
3 CRR
4 Facility Description
5 Securities Description
6 Document (s) to be Deferred
7 Deferred Up to (Date)
8 1st Deferral / 2nd Deferral
9 Reasons for Deferral Request
RM Name: _______________ RM Signature:________________
Approval Authority Signatures/ Recommendations:
___________________________________________________________________________
398
MCB Bank Limited,
__________Branch,
___________________
Dear Sir
Authority Letter
The undersigned do hereby authorize you to arrange on my / our behalf valuation

of the following referred immovable / movable property (ies), held by you, or offered,
as collateral security, from the following name Valuer, enlisted on your Approved
Panel, in accordance with your requirements in context of my / our request for
financial facility (ies) or my / our finance account with you.
In addition, you are authorized to pay on my / our behalf, professional charges for
valuation of the property to the Valuer, amounting to Rs. _________/- being pre-
negotiated; and duly conveyed to and agreed by me / us; and to debit my / our
account with you for the said payment, OR to make the payment of the said
charges on my /our behalf, by way of Cheque # ______________, furnished to you.
Further, the undersigned do hereby waive all and any rights of objection or claim in
this respect, towards you or the Valuer.
Property
__________________________________________________________________________________
____________________________________________________________________________,
owned by ______________________________.
Valuer
__________________________________________________________________________________
__________________________________________________________________________________
____________
(_______________________)
M/s. / Mr. __________________.
___________________________________________________________________________
399
TERMS OF REFERENCE (TOR) FOR FSV OF PROPERTIES
We have noted that following is the Standard TOR for FSV:-
Forced Sales Valuation Reports are required to invariably provide us following

information about the surveyed property:-
1. The basis of evaluation, present market value and forced sale value etc.
2. The realizable values of mortgaged/pledged assets must be an estimate of

the amount that could currently be obtained by selling the assets in a
forced/ distressed sale conditions.
3. In determining the forced sale value you should consider various factors
affecting the sale ability of the property including any difficulty in
obtaining possession of the property, its location and condition and the
prevailing economic conditions in a particular sector business or
industry.
4. Elaborate details of the building structure and construction quality of the

properties/ machineries/ stocks surveyed.
5. Highlight any negative features relating to Asset surveyed which may

prove detrimental to the interest of the Bank either in the short or long
term. This would include not only structural aspects but also matters
concerning ownership, planning approvals, alternate use, restrictions
and proximity to hazardous factors etc.
6. The valuation report should comment in detail regarding any tenancy or

leasehold effect on the value of assessed property/asset.
7. It should be clearly mentioned in the report that the above matters have
been duly considered and that the work was carried out in accordance
with the terms of reference.
8. The valuation report of Plant & Machinery should clearly mention the
condition of the Plant & Machinery by dividing it into the following
categories:-
o In Operation.
o Close/ in liquidation at the time of valuation.
9. Factors that have been taken into consideration to arrive at the valuation
to be also mentioned.
10. The report will be used by the external auditors/SBP/Bank/ any other
entity of the bank/ SBP for forming an opinion on the adequacy of the
provision requirement or for any other purpose that Bank may requires.
___________________________________________________________________________
400
11. There is a specific auditing standard IAS-18 which covers the procedures
to be followed by auditors for using the work of an expert. The report,
therefore, should fulfill the requirement of IAS 18 and in accordance with
guidelines provided in Prudential Regulation # VIII of SBP or any other
guidelines pertaining to the mater issued by any controlling authority.
12. The report prepared by Valuer at the instruction of MCB shall not be
handed to Bank’s customer or any other person and the same may be
considered as Bank’s property.
13. The TOR may be modified by MCB before assigning any assignments or
thereafter.
We have read above mentioned bank’s requirements and these are accepted to us.
SURVEYOR/EVALUER
Name_________________
Signature________________
___________________________________________________________________________
401
Ref No.
Date:
The Manager
MCB Bank Limited
(Branch Office)
Dear Sir,
AUTHORIZATION FOR APPOINTMENT OF MUCCADUMAGE – STOCK / ASSETS

UNDER BANK’S PLEDGE
I/We --------carrying on business at ------------- authorize you to appoint -------------

or any other Muccadum as approved by Bank for supervision of stocks / assets
under your pledge against financing allowed / to be allowed by ----------of MCB
Bank Limited.
The goods/assets under pledge of MCB Bank Ltd., are / shall be stored at -----------
--------or any other place of storage at the discretion or instruction of Bank.
We shall keep the goods held under bank's behalf / lien separately from all other
goods and name of MCB Bank Limited shall be displayed at all places where such
goods are stored / kept and shall allow authorized representatives of the bank free
access to such goods at all times.
I / We shall keep the goods in such a way that the same may be in countable /
measurable condition. Stacking / restacking / making of separate compartment /
partitioning to be made where advised. To determine the quality of goods due to
long storage / life of goods or for any other reason whatsoever, I / We agree to
undertake that you may get the sample of goods extracted & removed and get
valued / tested by a laboratory / institution / professional of your choice and
expenses incurred on this account will be borne by me / us.
I / We also agree that Bank may advise the Muccadum to place sufficient number
of Chowkidars / Godown Keepers as deemed necessary by the Bank to ensure
proper protection, supervision, check and safety of the pledged goods / stock /
machinery and we undertake to pay Muccadumage charges for --- Chowkidar(s) /
Godown Keeper(s) for Rs.-------/ per month per site or part thereof.
I/We hereby undertake to maintain sufficient credit balance in my/our Current

Account/cushion in Running Finance Limit in order for you to settle monthly
Muccadum Service Charges there from. In this respect, you are hereby authorized
to pay on my/our behalf Muccadum Service Charges to above mentioned
muccadum, amounting to Rs---- per month ,duly conveyed to and agreed by
me/us, to debit of my/our Current/Running Finance Account # ------------with you.
In case of insufficient funds in my/our above referred account, you have my/our
irrevocable authority to recover Muccadum Service Charges from our other
deposit/loan account(s) at my/our cost. Further the undersigned do hereby waive
all and any rights of objection or claim in this context towards you or muccadum.
___________________________________________________________________________
402
I / We also agree and undertake that no delivery of pledged goods / stock or any
portion thereof shall be affected / released / requested from the godown / premises
without Bank’s delivery order duly signed by the Bank’s authorized signatories.
Since the above mentioned stock are / shall be stored / lying in our Godown / any
Godown as per our authorization, we hereby absolve the Bank as well as-------------
--------------- of any liability as to deficiencies / shortage / theft / damage or
deterioration of any kind in said stock of ------------- mentioned above. It shall be
our responsibility to ensure to make proper arrangements that the pledged goods /
stocks / machinery are not removed / lifted from the Premises / Godowns without
any delivery order signed / issued by at least two authorized signatories of the
Bank as well as Muccadum and we undertake to make good for any loss sustained
by the Bank on this account.
For goods stored at premises not owned by us, we enclose Disclaimer Certificate to
the effect that the owner of the Godowns do not have / shall have any claim / lien
on pledged goods & storage certificate duly signed by the owner of the Premises /
Godowns.
It shall be our responsibility to keep the pledged goods insured for all the required
risks including but not limited to fire, riot, rain, earthquake, civil commotion,
terrorism, flood, storm, theft, burglary, lightening, looting, war etc. from a Bank’s
approved Insurance Company under bank clause and meet all terms and
conditions (firefighting, storage & security arrangement etc.) of the policy.
Moreover, Bank at its own discretion may obtain the required risks covered at our
cost, without being responsible for obtaining the same.
Nothing contained in this letter / above shall prejudice Bank's right as per any
other agreement or indemnity / guarantee signed by us in favor of Bank.
Yours faithfully,
(Signature & Company Stamp)
___________________________________________________________________________
403
M/s.
___________________
Dear Sir(s),
MUCCADUMAGE SERVICE
1. You are advised to take control / possession of

_______________________________________ (Details of Goods / Stocks /
Machine) kept in _______________________________ (Address of godown /
premises), in trust for the Bank. (MCB Bank Ltd) and on behalf of the Bank
and to release as per instructions of the bank.
2. The said ‘Goods’ shall be stored and kept in the said ‘Godown/Premises’
under the lock and key effective control and your custody.
3. The said goods are exclusively pledged and/or under the lien of the Bank to
secure the Fund and Non Fund Based banking and financial facilities
allowed and/or agreed to be allowed to the customers of the Bank.
4. The said goods shall only be released on the basis of Delivery Orders duly
signed by the authorized officers of the Bank to the person mentioned
therein.
5. The delivery of the goods shall be as per details mentioned in the Delivery
Orders and in the presence of godown keeper.
6. You shall provide at your own expenses and responsibility, the services of
sufficient staff to carry out the obligations / duties under this Agreement to
the entire satisfaction of the Bank. However, nothing contained herein shall
render such staff, provided/sent by the Muccadum to the Godowns to reform
the duties undertaken in any way as an employee of the bank.
7. You shall be liable for all losses, theft, damages, pilferage, claim demands
expenses, charges actions and suits etc., which the bank shall suffer due to
shortages, loss and detraction of the goods for any reason whatsoever.
8. You shall keep bank indemnified against all losses, damages, payments
demands dues, claims, expenses, charges, suits and action etc., if sustained
hereunder due to any reason or negligence on your part.
9. You shall keep the goods, held by you on bank’s behalf, separately from all
other goods and each customers goods shall be kept separately & name of
MCB Bank Limited, Branch shall be displayed at all places where such
goods are stored/kept, and shall allow all authorized representatives of the
bank fee access to such goods at all time.
10. You shall take all precautions to save the goods / stocks from any claim /
charges / lien / demand of any person whatsoever.
___________________________________________________________________________
404
11. You shall take all steps in order to ensure that while the stocks are lying on
the plinth / godown / warehouses, rented or approved by the Bank, the
same are not subjected to any damage or loss for any reason whatsoever and
shall take such steps as may be necessary against damage, loss pilferage
and theft.
12. You shall submit to the bank stock / goods report on each receipts /
delivery. A monthly stock report shall be necessary submitted on 3rd
working day of the following month. More frequent stock reports shall be
submitted if required by the branch for specific case.
13. The stock / goods report shall be verified and duly signed by the authorized
representative(s) / staff of the bank.
14. The bank reserves the right to inspect and verify the said goods at any time
and in case of any loss and/or damage and/or short fall the MUCCADUM
shall made the payment, cost and expenses determined by the bank
immediately without any objection / question, contents or otherwise.
15. Nothing contained in this letter above, shall prejudice Bank’s right or as per
any other agreement or indemnity / guarantee signed by you in favor of our
Bank.
Yours faithfully,
Credit Risk Control Officer/Manager

MCB Bank Limited
______________________________ CRC Hub/Branch
___________________________________________________________________________
405
M/s.
Dear Sir(s),
INSPECTION OF GOODS PLEDGED / HYPOTHECATED TO BANK
Enclosed is statement of stock of goods for the month of / as on ______________ of

our borrowers M/s. ______________________________________. Please inspect the
goods lying in their premises and send us your report for record. You usual charge
in this respect be advised to us.
A copy of his letter is endorsed to the borrowers requesting them to allow you to
inspect the goods on our behalf.
Yours faithfully,
Credit Risk Control Officer/Manager

MCB Bank Limited
______________________________ CRC Hub/ Branch
C.C.TO: M/s. _____________________________________

Kindly extend your cooperation to the inspecting officer of M/s.
__________________ for inspection of goods hypothecated / pledged to us on
proper identification.
___________________________________________________________________________
406
Circle: _____________________________________________________
Sites Under Super Vision of Muccadum as on: _____________________
Description of Value of Current Number of Status Complete Date of Borrower Branch Muccadum
Stocks Stocks Outstanding chowkidars Fresh(F)/ Address of Entrusting
against Pledged appointed Adjusted (A) Pledged Sites Site
stocks
____________________________________________________________________________________________________________________
407
MUCCADUM COPY (ORIGINAL)
S.No.
Ref.#
Date
d
DELIVERY ORDER
_______________________________________
To,
M/s.
Please deliver the following goods stored at Godown/Plinth

__________________________________________________________________________________
________ under ______________________ on Account M/s.
___________________________________________________ to their authorized agent
against surrender of this delivery order:
Quantity & Marks

Description / Rate
Unit of and Value
Quality per Unit
measurement Number
For: MCB Bank Ltd

Branch:
Authorized Authorized
Signature Signature
Prepared By: __________________________
The Bank is not responsible for the contents or the

condition of the contents of any packages or for the
leakage or damage by white ants or vermin etc.
Received from MCB Bank Ltd
________________________________
Dated: _______________________
(Customer’s signature)
1- This delivery order should be presented to the Muccadums specified herein and
delivery of Cotton Bales should be obtained within 24 hours of the issue of the
___________________________________________________________________________
408
order. Any complain regarding non-delivery of goods should be made to the
Bank within two days of the date of issue of this order otherwise the Bank shall
not be responsible for any delay in delivery of the goods or for any loss or
damage caused by such delay.
2- Delivery of the goods shall be made by the Muccadums on payment of all their
charges and dues in respect of the goods delivered.
3- If the delivery order is not presented to the Muccadums within 24 hours as

mentioned in Item # (1) above or if the Cotton Bales are left or allowed to
remain with the Muccadums after 24 hours of the issue of this order for any
reason whatsoever the Muccadums shall be deemed Customer and the Bank
shall not be responsible for any consequences arising out of such delay.
___________________________________________________________________________
409
MUCCADUM COPY (DUPLICATE – to be returned to bank)
S.No. 00001
Ref.#
Date
d
DELIVERY ORDER
_______________________________________
To,
M/s.

__________________________________________________________________________________
_______ under ______________________ on Account M/s.
Quantity & Marks

Description / Rate
Unit of and Value
Quality per Unit
measurement Number
For: MCB Bank Ltd

Branch:
Signature Signature
Prepared By: __________________________

________________________________
Dated: _______________________
___________________________________________________________________________
410
To be returned to Branch duly completed & singed by you after delivery of
stocks.
Quantity/Quality
Opening ¾
Stock
Delivered ¾
Present ¾
Stock
Dated: Signature of
Muccadum /
Authorized person

___________________________________________________________________________
411
BORROWER COPY
S.No. 00001
Ref.#
Dated
DELIVERY ORDER
_______________________________________
To,
M/s.

__________________________________________________________________________________
_______ under ______________________ on Account M/s.
Quantity & Marks

Description / Rate
Unit of and Value
Quality per Unit
measurement Number
For: MCB Bank Ltd

Branch:
Signature Signature
Prepared By: __________________________

________________________________
Dated: _______________________
C.C.TO: M/s.
_____________________________________________________________________
(Borrower) we have debited your account with a sum of
Rs.________________ against the delivery order issued in terms of your
letter No. _____________________ dated _______________.
___________________________________________________________________________
412

___________________________________________________________________________
413
BRANCH COPY
S.No. 00001
Ref.#
Dated
DELIVERY ORDER
_______________________________________
To,
M/s.

__________________________________________________________________________________
_________ under ______________________ on Account M/s.
Description / Quantity & Marks Rate

Quality Unit of and per Unit Value
measurement Number
For: MCB Bank Ltd

Branch:
Signature Signature
Prepared By: __________________________
________________________________
Dated: _______________________
C.C.TO: M/s.
_____________________________________________________________________
(Borrower) we have debited your account with a sum of
Rs.________________ against the delivery order issued in terms of your
letter No. _____________________ dated _______________.
M/s.
_____________________________________________________________________
(Muccadum) to be returned to Branch duly completed & singed by
Muccadum after delivery of stocks.
Quantity/Quality
___________________________________________________________________________
414
Opening ¾
Stock
Delivered ¾
Present ¾
Stock
Dated: Signature of
Muccadum /
Authorized person

___________________________________________________________________________
415
(TO BE TYPED ON NON-JUDICIAL STAMP PAPER)
LETTER OF AUTHORIZATION
The Manager
__________Branch
MCB Bank limited
Dear Sirs,
PAD/FIM
I/We request you to arrange clearance of the goods cover by (dt. On) the
above noted Bill received under Letter of Credit No.______ opened by you on my/our
request. The documents may be sent to Messers __________________________or to
any other Clearing Agent of your choice for clearance of the goods on my/our
account on my/our behalf and to store them at _______________ or to rail /
transport them to _________________and insure the same.
In consideration of your agreeing to arrange for clearance as aforesaid,

I/We hereby agree and undertake to indemnify you and to keep you indemnified
and harmless against all claims, demands, detriments damages, expenses, costs,
charges, etc. arising on your acting upon my/our said instructions.
We further agree to undertake and confirm as under:-
1) That Messrs______________________________, Clearing Agents or, any other

Clearing Agent to whom the documents have been forwarded shall for all intents
and purpose be deemed to be my/our Clearing Agents, as if they were appointed
by me/us directly and you shall not be liable or responsible for any negligence or
default of the said Clearing Agents. Moreover, we undertake to bear all the losses
arising due to negligence, fraud or default of the above clearing agent.
2) That you will not under any circumstances, be responsible for the contents or
condition of the packages of consignments, shortages, if any, and demurrage
incurred in clearance of the goods, damage caused to goods in Clearance or storage
whether in the Godown of the said Clearing Agent or in the Godowns of your Bank
or any other person.
3) You shall be entitled, without being bound to do so, to pay Custom Duty, Sales
tax as well as other taxes, Clearing and storage charges of the said Clearing Agent,
demurrage and or any other cost or expenses incurred by the said Clearing Agent
without making any reference to me/us and you shall be entitled to debit such
payments, charges or expenses to my/our account with you or to my/our account
with any other branch of your Bank. If the balance in my/our account be not
sufficient to cover such payments, costs or expenses incurred by you, I/We
undertake to reimburse the same to you or to adjust debit balance in my/our
account on demand, Clearing Agent’s bill will be the conclusive proof of the duties,
sales tax and other taxes, storage Charges, demurrage or any cost or expenses
incurred by the Clearing Agents and will not be questioned by me/us.
___________________________________________________________________________
416
4) That documents mentioned above and/or the goods covered by the above
mentioned documents shall at all stages remain under your lien and/or pledge for
the Principal amount of the bill, mark up and bank charge and for any payments
made by you or any costs, charges and expenses incurred by you or the said
Clearing Agents or for any amount that may be owing to you either in connection
with the import of the said goods or on my/our account maintained with you or on
account of any Advance, Loan, Overdraft or any other banking facility allowed by
you to me/us.
5) That the Bank shall not be responsible for any delay in clearance of the goods
whether due to any default or negligence of the Clearing Agent, or otherwise or for
any loss or damage which may be caused to me/us by such delay or otherwise
and/or by any variation in the Tariff, Rates, Duties, or Taxes or by imposition of
any Penalty, Rates, Taxes or Duties which may directly or indirectly affect the
goods covered by the above documents, due to any reason whatsoever.
6) That it will be my/our responsibility to arrange for wagons for railment of goods
to_____________.
In case wagons are not allotted or procured, we shall not hold the Bank or Clearing
Agents responsible for any damage whatsoever caused in storing the consignment
at____________ PROVIDED ALWAYS that the Bank’s right to claim payment against
the bill from me/us will not in any manner be prejudiced or affected by its agreeing
to undertake clearance of the consignment and that the Bank will at any time or
stage be entitled to claims payment of the bill with Mark-up @_____% p.a. from
me/us and such cost or costs and charges that might have been incurred by the
Bank without being able to present the relative documents, the same having been
parted with and sent to the Clearing Agent under my/our Instructions, as
aforesaid.
7) In case bank needs to store goods in bonded ware house, delivery of aforesaid
goods during to the transit/its storage in Bonded Ware House/Tank Terminal shall
not be taken by us nor we shall make request from Customs Authorities / Incharge
of Bonded Ware House/ Incharge of Tank Terminal, for delivery of aforesaid goods,
without obtaining Delivery order from your Branch.
8) We agree and undertake to indemnify MCB Bank Limited and Keep it harmless
from and against all losses, damages, claims, detriments, expenses, charges, taxes,
costs, etc. if sustained by the Bank while acting under this letter of Authorization
or acting on our instructions. This letter of Authority is irrevocable and shall
remain binding on us, our successors-in-interest and assigns.
Yours faithfully,
____________________
Dated: ______________
Place: _______________
___________________________________________________________________________
417
(TO BE TYPED ON NON-JUDICIAL STAMP PAPER)
LETTER OF AUTHORIZATION
The Manager
__________Branch
MCB Bank limited
Dear Sir,
PAD/FIM
I/We request you to arrange clearance and storage of the _______________ (quantity)
metric tons _____________oil from ______________ (hereinafter called as the “Goods”) cover by
(dt.______ on). This Bill was received under Letter of Credit No._________ opened by you on
my/our request. The said Goods has arrived at Karachi __________port vide vessel
_______________Against Bill of landing No.______________ dated _______________issued by
___________________to the order of the bank. The documents may be sent to Messrs
__________________________ (Clearing Agent) or to any other Clearing Agent of your choice for
clearance of the goods on my/our account on my/our behalf and goods after clearance will
be stored in Tank(s) # ___________________ of M/s ________________________ (Terminal), or to
any other Terminal of your choice. These goods shall also be insured for all pertinent risks.
In consideration of your agreeing to arrange for clearance and storage as aforesaid,

I/We hereby agree and undertake to indemnify you and to keep you indemnified and
harmless against all claims, demands, detriments damages, expenses, costs, charges, etc.
arising on your acting upon my/our said instructions.
We further agree to undertake and confirm as under:-
1) That above mentioned Clearing Agent and Terminal or any other Clearing Agents
and/or Terminal to whom the documents have been forwarded or with whom goods has
been stored, shall for all intents and purpose be deemed to be my/our Clearing Agents
and/or Terminal, as if they were appointed by me/us directly and you shall not be liable or
responsible for any negligence or default of the said Clearing Agents and Terminal.
Moreover, we undertake to bear all the losses arising due to negligence, fraud or default of
the above Clearing agent and Terminal.
2) That you will not under any circumstances, be responsible for the contents or condition
of the packages of consignments, shortages, if any, and demurrage incurred in clearance of
the goods, damage caused to goods in Clearance or storage whether in the godown of the
said Clearing Agent, Terminal, Bank or in godown of any other person assigned by the
bank.
3) You shall be entitled, without being bound to do so, to pay Custom Duty, Sales tax as
well as other taxes, Clearing and Storage charges, Demurrage and or any other cost or
expenses incurred by the said Clearing Agent, Terminal without making any reference to
me/us. And you shall be entitled to debit such payments, charges or expenses to my/our
account with you or to my/our account with any other branch of your Bank. If the balance
in my/our account be not sufficient to cover such payments, costs or expenses incurred by
you, I/We undertake to reimburse the same to you or to adjust debit balance in my/our
account on demand, Clearing Agent or Terminal’s bill will be the conclusive proof of the
duties, sales tax and other taxes, storage Charges, demurrage or any cost or expenses
incurred by the Clearing Agents and Terminals, and will not be questioned by me/us.
4) That documents mentioned above and/or the goods covered by the above mentioned
documents shall at all stages remain under your lien and/or pledge for the Principal
___________________________________________________________________________
418
amount of the bill, mark up and bank charge and for any payments made by you or any
costs, charges and expenses incurred by you or the said Clearing Agents and Terminal or
for any amount that may be owing to you either in connection with the import of the said
goods or on my/our account maintained with you or on account of any advance, Loan,
Overdraft or any other banking facility allowed by you to me/us.
5) That the Bank shall not, under any circumstances, be responsible for delay in
clearance of the goods whether due to any default or negligence of the Clearing Agent, or
otherwise or deterioration in contents/quality, condition and specification of the said
Goods, shortage if any and any loss or damage which may be caused to me/us by such
delay or otherwise and/or by any variation in the Tariff, Rates, Duties, or Taxes or by
imposition of any Penalty, Rates, Taxes or Duties which may directly or indirectly due to
any reason whatsoever.
6) In case Bank needs to store goods in tanks other than the Tanks of Terminals, it will be
my/our responsibility to arrange Wagons and Tankers for delivery of Goods from the Tanks
of the Terminal to the bank’s prescribed location of storage. This transfer of oil will be at our
cost and expenses and all expenses incurred by the bank for such quantity or quantities of
oil plus all other charges relating to the same shall be recovered from us.
In case wagons are not allotted or procured, we shall not hold the Bank, Clearing Agents or
Terminal responsible for any damage whatsoever caused in storing the consignment
at____________ PROVIDED ALWAYS that the Bank’s right to claim payment against the bill
from me/us will not in any manner be prejudiced or affected by its agreeing to undertake
clearance of the consignment and that the Bank will at any time or stage be entitled to
claims payment of the bill with Mark-up @____________________% p.a. from me/us and such
cost or costs and charges that might have been incurred by the Bank without being able to
present the relative documents, the same having been parted with and sent to the Clearing
Agent under my/our Instructions, as aforesaid.
7) Delivery of aforesaid goods during to the transit/its storage in Bonded Ware House/Tank
Terminal shall not be taken by us nor we shall make request from Customs Authorities /
Incharge of Bonded Warehouse/ Incharge of Tank Terminal, for delivery of aforesaid goods,
without obtaining Delivery order from your Branch.
8) We agree and undertake to indemnify MCB Bank Limited and Keep it harmless from and
against all losses, damages, claims, detriments, expenses, charges, taxes, costs, etc. if
sustained by the Bank while acting under this letter of Authorization or acting on our
instructions. This letter of Authority is irrevocable and shall remain binding on us, our
successors-in-interest and assigns.
Yours faithfully,
____________________
Dated: ______________
Place: _______________
___________________________________________________________________________
419
MCB Bank Ltd Ref. No. __________

_________________Branch
Date.____________
To, M/s________ (Name of Importer) _____

_____________________ Address __________________________
_____________________ _________________________________
_____________________ Phone No._________________________
CLEARANCE OF CONSIGNMENT
Dear Sir(s),
We are enclosing following shipping documents for goods of above importers, under pledge
of our Bank. Please clear these goods at your earliest and follow the instructions detailed
hereunder:-
1. Duty & Sales Tax would be paid by the importers. Please contact / collect the same
from them at the address given above.
2. Goods after clearance would be stored in the godown/tank terminal/bonded ware
house at __________________. In case goods are stored in bonded ware house, Storage
certificate/ receipt will be obtained from approved Muccadum/ Tank Terminal/ bonded
ware house and same is to be provided to us. The storage certificate must be addressed
to MCB and it should include that delivery of goods will be upon bank’s instructions.
3. After clearance, goods would be transported by/under your control or approved C&F
Agent / Muccadum M/s.__________________________ by Rail / Truck to
__________________.
_______________
4. The damaged / short landed goods should be surveyed immediately and a claim be
filed with the insurance company or with the concerned authorities, as the case may
be, under advice to us.
5. The goods covered under shipping documents should be attended to, as expeditiously
as possible. In case of any delay in clearance of the consignment, please inform
position to us in writing.
6. Bank would not be responsible for demurrage, if caused due to delay on your part in
clearance.
7. Please note, not to deliver goods, without authority from authorized of our____________
branch person.
8. Please provide In-Bond, Original Importer’s copy of General Declaration to us /
to_____________________ branch, under advice to us.
9. Transportation Receipt must be made in Bank’s name, mentioning
_____________________ branch and forwarded immediately to the branch concerned.
Please advise transporter to call at our branch office for unloading instructions. Send
us, Transportation Receipt for onwards submission to our Branch.
PARTICULARS OF SHIPPING DOCUMENTS:
Bill No.__________________________________
L/C No.________________________
for Rs._____________________
Vessel ________________________
No. of Packages ______________
Particulars of goods______________________.
___________________________________________________________________________
420
PARTICULARS OF ENCLOSURES:
a. Invoice ______________________
b. Bill of Lading _________________
c .Draft _______
d. Weight & Packing List ___________
e. Insurance Policy & Memo ____________________
f. Inspection Certificate _______________
g. Sales tax exemption certificate ___________
h. Miscellaneous others _______________.
Please obtain storage receipt, after the consignment stands cleared and stored, as per above
instructions and forward the same to designated branch (B/O. Karachi Main / Nila
Gumbad Lahore), along with C&F bill and other documents and copies to us.
Yours faithfully,
______ __________________
Officer Authorized Signatory
ACKNOWLEDGEMENT
We hereby acknowledge receipt of the shipping documents mentioned above under Trust
and undertake to comply with the above said instructions / terms. We will arrange goods
clearance by (electronic/manual) filing of General Declaration.
Karachi/Lahore
Date_________
___________________________________
Authorized signature of clearing agent with seal/rubber stamp
___________________________________________________________________________
421
Appendix XI to Chapter 5.6
(TO BE TYPED ON NON JUDICIAL STAMP PAPER)
Date:
The Manager
___________Branch
MCB Bank Limited
We M/s _____________________________a sole proprietor concern(s) /partnership firm

registered under the Partnership Act, 1912 / limited company incorporated under
Companies Act, 19-- carrying on a business as Clearing & Forwarding Agents and
having its Office at ________________________. Upon our request the BANK (MCB
bank Ltd) has agreed inter alia to entrust us, the assignment relating to Clearing of
goods amounting of Rs.________M imported by one of BANK’s CUSTOMER M/s
_______________________. In this regard, we hereby undertake;
1. We shall work on behalf of and under instructions of the Bank as Clearing &
Forwarding Agent in respect of goods under lien of the Bank. We shall comply all
time to time instructions received from the Bank;
2. All documents such as bill of lading, RR's, delivery orders, invoices etc., and or
the goods covered by such documents or others entrusted by the Bank to us during
the course of business shall be held strictly in trust for the Bank and we shall carry
out all directions that may be given by the Bank to us for storage/import and/or
export of goods for and on behalf of the constituents of the Bank, and we shall
deliver to the Bank all documents, invoices, bills of lading, railway receipts, delivery
orders, general declarations of and concerning storage, import and export of the
goods forthwith on the goods being released from godown or from the Customs
and/or forthwith after the goods are stored shipped and/or railed for export.
3. We shall submit to the Bank correct, accurate and complete reports from time to
time regarding quantity and number of packages of all goods cleared by us and
stored with us or entrusted by the Bank to our custody. Such reports shall be duly
authenticated by the signatures of our authorized representatives and we shall be
responsible to the Bank for the particulars and correctness of such reports.
4. That the Bank shall have irrevocable lien on and against all the goods in our
custody or part thereof and also on and against the documents relating to such
goods and we shall not pass on delivery of the goods, which may come in our
possession in due course in any manner except in accordance with the delivery
order/instructions, issued by authorized signatories of the Bank and the Bank
shall be entitled to recall, stop and cancel the action on such documents and we
undertake to abide by all or any of the instructions issued by the Bank in this
regard without any reference to anyone else.
5. Under no circumstances we shall use the goods/documents or part with our

possession excepting for the purpose of clearance, bailment or export without the
Bank's order and specific permission to the use which in either case shall always
be in writing. No instructions other than those in writing by the Bank's authorized
representative shall be carried out by us.
___________________________________________________________________________
422
Appendix XI to Chapter 5.6
6. We shall not during the continuance of this agreement or otherwise
pledge/assign/encumber/charge/hypothecate/mortgage any goods or merchandise
consigned to us nor shall do or permit other act whereby the interest of the Bank is
in any way is impaired or prejudicially affected.
7. We shall keep constant liaison with customs and KPT authorities and all other
agencies with a view to effecting prompt clearance and expeditious delivery of
cleared goods.
8. We undertake to comply with all instructions of the bank as to mode of dispatch

of consignment or for handling of the goods otherwise.
09. That all moneys for the purpose of custom duty or any other taxes and
expenditure shall be received directly from Bank’s CUSTOMER and bank shall not
be liable for any of such payments.
10. We undertake to perform all functions, and duties incidental to the clearing &
forwarding of the consignment from time to time assigned to us with due diligence,
care and high professional standards at top priority basis. Any damage, caused to
any consignment entrusted to us, due to negligence or willful delay on our part,
shall be reimbursed by us on demand from the Bank and that it shall not be
contested by us for any reason.
11. We hereby undertake to indemnify and keep the Bank always indemnified
against any and every loss, damage, costs, charges and expenses which the Bank
may at any time suffer on account of our failure to perform or perform with due
diligence all duties, functions, responsibilities and acts entrusted to us hereunder
or which may at any time be entrusted by the Bank to us including any
inaccuracy, defect, fault, discrepancy or omission contained in any of the
documents or assurances provided by the Agents to the Bank in relation to any of
the matters entrusted by the Bank to us at any time for above mentioned Customer
of the Bank.
12. Bank shall have absolute power to stop assigning us clearing assignments at
any time without giving any reasons on serving a fortnight's notice to us of such
termination and without being liable for any compensation, damage or cost
whatsoever. We shall forthwith deliver to the Bank or to such persons as may be
nominated by the Bank goods/consignment and/or any other documents that may
be lying in our custody at that time.
13. At no stage and in no circumstances we shall assign, handover, delegate the

clearing and forwarding job entrusted to us by the Bank, to any other agent(s)
without prior permission in writing of the Bank.
The indemnity shall continue to remain in full force/binding and be applicable on

us for individual transactions/dealing during working by us for bank’s Customer
M/s ___________________ and until bank specifically discharge us in writing.
______________________
(C & F AGENT)
___________________________________________________________________________
423
Appendix XII to Chapter 5.6
TRIPARTITE AGREEMENT FOR STORAGE OF OIL
THIS AGREEMENT is made at ___________, this _____________day of _______________,
A M O N G
M/s. _______________________________ a company, incorporated under the laws of Pakistan
and having its Registered Office at _____________________________ (hereinafter referred to as
“the TERMINAL”, which expression shall mean and include its successors-in-interest and
assigns) of the ONE PART.
A N D
M/s. _____________________________ a company, incorporated under the laws of Pakistan
and having its Registered Office at ____________________(hereinafter referred to as “the
IMPORTER”, which expression shall mean and include its successors-in-interest and
assigns) of the SECOND PART.
A N D
MCB BANK LTD, a Banking company, incorporated under the laws of Pakistan and having
its Registered Office at MCB Building, F6/G6, Jinnah Avenue Islamabad, Principal Office at
MCB Building, 15 Main Gulberg, Lahore; and a Branch Office at _________________________,
(hereinafter referred to as “the BANK”, which expression shall mean and include its
successors-in-interest and assigns) of the THIRD PART.
WHEREAS, the IMPORTER is a Customer of the BANK; and has been allowed by the BANK
a financial accommodation by way of Letter of Credit Limit / Facility (hereinafter referred to
as the "Facility"), for a period commencing on __________ and ending ______, for import of
____________________(hereinafter referred to as “the said oil").
AND WHEREAS, the IMPORTER is desirous of availing of the TERMINAL’s facilities and
services, for handling, clearance and storage of the said oil, as and when imported by the
CUSTOMER under the BANK's LC, under certain specific terms and conditions agreed
between the IMPORTER and the BANK; and the TERMINAL has agreed to provide the
requisite facilities and services on the terms and conditions appearing hereinafter.
NOW THEREFORE THIS AGREEMENT WITNESSETH AS FOLLOWS:
1. That the TERMINAL has agreed to handle, clear and store the said oil for the
IMPORTER/BANK, at the cost of the IMPORTER, as and when imported by the
IMPORTER under the BANK's LC. The TERMINAL has understood that the said oil
as and when imported as such shall be under the BANK's PLEDGE/LIEN.
2. That the TERMINAL shall arrange, as and when a consignment of the said oil
reaches Karachi, for offloading and transmission of the said oil from the Vessels to
the TERMINAL’s TANK(S) located on Plot ____________________, Oil Installation Area,
Karachi (hereinafter referred to as “the said Tank”); and shall store the said oil at the
Tank as Bailee and trustee for the BANK as the said oil imported shall remain under
pledge/lien of the BANK.
3. That the BANK on arrival of the consignment shall convey to the TERMINAL in
writing the following details:
a) LC Number & date and other details thereof;

b) Quantity / Weight of the consignment / said oil;
c) Details of the respective Vessel;
d) Bill of Lading Number and date thereof; and other relevant details thereof.
___________________________________________________________________________
424
4. That the TERMINAL on arrival of the consignment shall provide Storage Certificate/
Letter and convey in writing to the BANK the TANK Number, Description of oil,
Quantity, Storage date and all other relevant details thereof, wherein the said oil
shall be / has been stored; and this Storage Certificate shall clearly describe that
the goods shall be delivered by the TERMINAL upon receiving Deliver Order from the
BANK.
5. For the purpose of facilitating the clearance, handling and storage of the said oil at
the TERMINAL's Tank, the IMPORTER shall obtain from the BANK and furnish to
the TERMINAL, a complete set of import shipping documents, including the Bill of
Lading in original at least three days before the arrival of the Vessel. The IMPORTER
hereby agrees and undertakes to provide all other documents and assistance as may
be reasonably required by TERMINAL for smooth and prompt clearance and
discharge of the Consignment of the said oil as and when a request in this behalf is
made by the TERMINAL without jeopardizing the BANK’s PLEDGE/LIEN thereon.
The release of documents by the BANK will also be in trust for the BANK and the
documents will be returned to the BANK by the IMPORTER/TERMINAL after doing
the needful.
6. Once the said oil reaches the TERMINAL’s TANK, the TERMINAL shall issue its
receipt for the same in duplicate, the original of which shall be handed over to the
BANK and/or to its nominated Muccadums or agents and the duplicate shall be
handed over to the IMPORTER.
7. The said oil shall be kept stored at the said Tank of the TERMINAL and shall be held
by the TERMINAL in trust for the BANK. Neither the TERMINAL shall release the
said oil or any quantity (ies) thereof nor the IMPORTER shall procure the release of
the said oil or any quantity(ies) thereof, except against manually signed Delivery
Orders issued by the BANK under the signatures of its authorized officers whose
names and specimen signature shall be provided separately by the BANK to the
TERMINAL to enable the TERMINAL to verify the signatures. The BANK shall have
the right to substitute the authorized officers and notify their names with specimen
signatures from time to time. Under no circumstances whatsoever shall the
IMPORTER obtain deliveries from the TERMINAL or the TERMINAL shall affect
deliveries of any quantity(ies) without the production of the original Delivery Orders.
All Delivery Orders shall be issued by the BANK only against full payments for the
quantity(ies) lifted, including import duty, port dues, octroi, storage charges and
other levies and costs mentioned in Clause 8 herein below.
8. The IMPORTER shall be solely responsible for payment of import duty, port dues,
octroi, clearing, forwarding, handling and transportation charges and other levies as
well as all costs and expenses, before the BANK shall permit any deliveries of any
quantity(ies) of the said oil from the Tank of the TERMINAL. The BANK shall not be
responsible for such levies and costs, except where the BANK at its sole discretion
and for the purposes of protecting of its interest or enforcing any of its rights as a
holder of pledge/lien may decide to pay such duty, dues, levies, cost, expenses, etc.,
for and on account of the IMPORTER. The IMPORTER hereby indemnifies and
undertakes to hold the BANK harmless from and against all losses, damages, costs
and expenses, which the BANK may suffer or sustain as a result of any demand,
claim, action or proceedings made, raised or initiated by any authority, person or
agency with regards to any such levies, charges, costs and expenses in connection
with or in relation to the said oil.
9. The TERMINAL shall make the deliveries of the quantity(ies) received at the Tank at
minimum of 99.80% of the actual quantity(ies) of the said oil actually received
___________________________________________________________________________
425
allowing a provision of spillage at a maximum 0.20% of the total quantity(ies)
received.
10. Delivery (ies) shall be made from the Tank during the normal working hours of the
day and only on working days of the BANK and only against Delivery Orders of the
Bank. Deliveries shall be made in usual customary manner; and usual modes of
transportation as is customarily and normally allowed.
11. For bonded said oil, the IMPORTER shall submit bills of entry through the clearing
agents nominated by the BANK and get the said oil ex-bonded and delivered against
the delivery order of the BANK.
12. The BANK shall have the right to monitor the storage, clearance, handling and
delivery of the said oil through its authorized representatives and/or the
Muccadums or clearing agents appointed by the BANK. In the event, any
discrepancy or irregularity should come to light, the TERMINAL as well as the
IMPORTER shall immediately remove and rectify the deficiencies.
13. The TERMINAL shall not deliver / release the said oil without delivery orders from
the BANK even against an understanding from the IMPORTER to procure the
relative delivery orders. Delivery Orders shall not be issued in blank.
14. The TERMINAL shall also not lend any quantity(ies) of the said oil to the IMPORTER
or to anybody else out of the TERMINAL’s own duty paid stocks against the quantity
to be stored under this Agreement. The quantity of the said oil stored shall not be
diminished or reduced except for provision for wastage mentioned in Clause 9
hereinabove.
15. The TERMINAL shall have no lien against the said oil stored under this Agreement to
secure any quantity delivered privately to the IMPORTER. Any such bilateral
arrangement between the TERMINAL and the IMPORTER would not be binding upon
the BANK and no quantity of the said oil shall be adjusted or set off against any
quantity released by the TERMINAL without the BANK’s delivery order.
16. The TERMINAL represents and warrants that the TERMINAL holds proper license
and permission to store the said oil and to provide the services covered by the
Agreement, and shall keep the IMPORTER and the BANK indemnified and harmless
against all costs, damages and proceedings in respect of any action taken by any
authority as a result of failure to maintain proper license or otherwise failure to
abide by the prevailing laws, rules and regulations.
17. The IMPORTER and the TERMINAL shall fulfill and abide by all rules and
regulations in handling storage and delivery of the said oil.
18. The TERMINAL represents and warrants that the Tank where the said oil will be
stored, would be technically sound and strong enough to withstand the hazards of
weather and environmental condition. The TERMINAL warrants, assures that proper
security measures have been taken to ensure safe storage of the said oil.
19. The TERMINAL and the IMPORTER shall be liable for any negligence or omission in
the storage, handling and delivery of the said oil.
20. The said oil shall be insured by the IMPORTER with an insurance company
approved by the BANK. The insurance policy shall be endorsed in favor of the BANK
and deposited with the BANK.
___________________________________________________________________________
426
21. The importer shall pay to the TERMINAL all relevant charges including handling,
storage etc.
22. The TERMINAL shall be responsible for obtaining Fire Insurance Cover of the said
oil.
23. No amendment in this Agreement will be valid until and unless it is made in writing
and signed by all the parties.
IN WITNESS WHEREOF, the Parties above named do hereby set their respective hands
hereinto the presence:
WITNESSES 1)
(TERMINAL)
1)
2)
(IMPORTER)
2)
3)
(BANKER)
___________________________________________________________________________
427
Appendix XIII to Chapter 5.6
Tank Terminals report

as on: _____________________________________________________
Storage with Quantity of Date of Limit Date of Initial Date of Limit Pak Liquid Borrower Branch
Tank Terminal Import Import Expiry Disbursement Tripartite Rupees cargo
(Name) Date Agreement description
____________________________________________________________________________________________________________________
428
Appendix XIV to Chapter 5.6
Ref. Dated
To : Mr. (Name)
(Address of Vendor)
From : (Name of Branch) (Branch Code)

(Branch Address)
(Branch Phone#, FAX # & Email)
REQUEST FOR ____________ (Details of required service) ________________

Please arrange ___ (Complete details of required service) _____ for the following
customer:-
A) Full name of the concern (In Block Letters):
B) Complete Mailing Address, Telephone / Fax Numbers:
C) Their Bankers (If required)
D) Special Instruction if any;
E) Type of Report Requested (Please tick):

Local Credit Report (direct interview with borrower)
International/Cross-border Credit Report
Market Reputation Checks (without contacting borrower)
SME Credit Reports (direct interview with borrower)
Charges Search Reports
Certified True Copies of Form29, Form-A or any other document from
SECP office.
Charge Registration
Legal Service
International/Cross-border Credit Report
We have noted the charges to be remitted within 48 hours on receipt of above
required documents/ completion of the ____________________________ through Pay
Order / Draft in favor of M/s._______________________ quoting the Invoice Number.
Signature & Stamp of Branch Manager
429
Credit Handbook
Section 6
Mark-up Calculation
&
Facility Structures
430
Section 6:
Mark-up Calculation and

Facility Structures
6.1 Mark-up Calculation
6.2 Funded Facilities
6.3 Non-Funded Facilities
6.4 Seasonal Finance
6.5 Government of Pakistan Commodity Finance –

Wheat
6.6 Financing against Cash/Near Cash Collateral
6.7 Financing Against Shares
6.8 Financing to Financial Institutions
6.9 Market Risk Leading to Credit Risk
431
6.1 Mark-up Calculation
6.1.1 Introduction
6.1.2 Mark-up
6.1.3 Mark-down
6.1.4 Sales Price
6.1.5 Purchase Price / Marked-up Price
6.1.6 Finance Period / Transaction Period
6.1.7 Grace Period
6.1.8 Fixed Vs. Floating Rate
6.1.9 Pricing of Loans on KIBOR Basis
6.1.10 Timely Payment Mark-up Rate (TPMR)
6.1.11 Standard Mark-up Rate (SMR)
6.1.12 Timely Payment Rebate (TPR)
6.1.13 Repayment Reminder
6.1.14 Mark-up Recovery Frequency for Short
Term Loans
6.1.15 Term Loans
6.1.16 Periodic Calculation of Mark-up Income
and Annualized Mark-up Rate
6.1.17 Mark-up Calculation on Classified
Advances – Non-Performing Loans
432
6.1.1 Introduction
This chapter explains the key concepts relating to Mark–up, and presents
illustrative mark–up computations and rules relating to recording of Mark–up.
Under the Non Interest Based (NIB) financial system, banks undertake a purchase
and sale transaction with a customer/borrower and earn mark–up/profit on the
transaction.
The key terminologies within the NIB system are explained below.
6.1.2 Mark–up
It is the rate of return on Bank’s finances. Bank continues to charge the rate of
mark–up mutually agreed upon between the bank and borrower but charging mark–
up on mark–up is strictly prohibited.
6.1.3 Mark-down
It is the rate of return on Bank’s finances in case of upfront recovery of mark-up.

Mark-down normally applies in case of discounting of bills.
6.1.4 Sale Price
Financing is to be made on the basis of purchase and sale of goods for which a
buy-back agreement is executed. The amount of finance made or to be made is the
sale price, which is generally the amount of the limit.
6.1.5 Purchase Price / Marked–up Price
Under the buy-back agreement, the customer agrees to re–purchase the asset from
the bank after a specified period against the payment of total amount, which
comprises the following:
• Bank’s total finance;
• Mark–up for the finance period; and
• Mark–up for the grace period, if any.
This is termed as purchase price.
Documents are to be executed for the Purchase Price / Marked–up Price. For
determining the Agreement Price, mark-up should be applied on the amount of
facility for the period of the limit @ Standard Mark-up Rate (SMR), but for charging
the mark up, it would be calculated @ Timely Payment Mark-up Rate.
433
6.1.6 Finance Period / Transaction Period
The period from the date of finance to the date of full and final adjustment of the
finance / expiry of limit is the finance period / transaction period which may be
expressed in number of days, number of months or number of years.
6.1.7 Grace Period (applicable in case of term loans)
Grace period is related to the installment–based finances. To facilitate the customer

for utilizing the asset for which the finance is to be made, in certain cases, a
specific period is allowed after expiry of which the installment period begins. The
length of grace period depends upon the nature of the asset and the circumstances.
Grace period is generally expressed in number of months. For example, a loan can
be approved for a term of three years inclusive of a six month grace period.
Example
If a loan with six years maturity including a grace period of six months with bi-
annual repayments is approved, the first installment will fall due after twelve
months.
6.1.8 Fixed Vs. Floating Rate
In case of fixed rate structure mark-up rates are fixed for the period of finance
whereas in case of a floating rate structure, mark-up rate is pegged to a yardstick
market rate which ensures that the lender’s spread remains intact irrespective of
the way yardstick rates move. For example it could be 1 % over LIBOR, T-Bill rate,
KIBOR etc.
6.1.9 Pricing of Loans on KIBOR Basis
As per SBP’s guidelines; the Karachi Inter Bank Offer Rate (KIBOR) is required to
be used as the benchmark rate for determining pricing / mark-up rate for all rupee
based Corporate, Commercial and SMEs lending as defined in the Prudential
Regulations. SBP has issued following instructions to banks for benchmarking
their lending rates to KIBOR:
KIBOR has been defined as the Average rate, Ask Side, for the relevant tenure,
as published on Reuter’s page or as published by the Financial Markets
Association of Pakistan in case the Reuters page is unavailable. The banks and
the borrowers will be free to decide the relevant tenure of KIBOR and the
spread over KIBOR at their discretion. KIBOR will be set for the lending facility
on the date of drawdown or on the mark-up reset date. The offer letters from
the banks to their clients should clearly indicate the KIBOR tenure, agreed
spread, frequency of revision etc.
434
Note: Re-setting frequency of KIBOR must be done according to the matching

KIBOR tenure which ranges from one week to three years in terms of instructions
available in section 3.
The requirement to use KIBOR as the benchmark rate is not applicable for the
following:
• Export Finance Scheme (EFS) or any other financing scheme of the State Bank
of Pakistan, where markup-up rates shall be charged as per SBP instructions.
• Term Finance Certificates/Commercial Papers approved by the Securities and

Exchange Commission of Pakistan (SECP) and/or submitted to any Stock
Exchange prior to January 31, 2004 and
• All Time Loans with agreements executed before January 31, 2004. However, if
the pricing is renegotiated, the pricing of such loans will need to be
benchmarked to KIBOR within the available tenors.
The financing rates under EFS will continue to be determined as per instructions
issued by the State Bank of Pakistan.
6.1.10 Timely Payment Mark–up Rate (TPMR)
It is the mark–up rate at which the bank wants to finance the customer, where
timely payments / repayments of principal and mark-up are being made in
accordance with the stipulated repayment schedule (after grace period, if any).
TPMR is used for the calculation of mark–up to be recovered in the repayment
schedule and for the making of accounting entries in the books of account.
TPMR shall also be applicable where:
• Principal and/or mark–up is paid within 25 days from the due date or earlier
than that. In case payment is not made by the customer within this grace
period available after the due date, SMR will be charged for the entire period for
which the markup was due. This is also applicable to all tranche based
finances.
Relevant Business Group Head would be authorized to condone the mark-up in

excess of TPMR in all those cases where TPMR is paid after a lapse of 25 days.
Such proposals shall not require processing by RMG. Business Units shall
process all such requests at their own.
However, an MIS of all such cases shall be presented to the President on

monthly basis by relevant Business Group Head.
• In late payment cases when SMR becomes applicable, efforts should be made by
the Business Units to recover the same to ensure credit discipline. However, in
case where SMR cannot be recovered and the customer has made the payment
of markup at TPMR, request for condoning of differential amount of SMR and
TPMR should be elevated to the competent authority without delay. Such
435
requests for condoning should be elevated to the competent authority

immediately Such difference should not be reported in monthly reporting of
credit data in CRMIS
6.1.11 Standard Mark–up Rate (SMR)
It is the mark–up rate which is stated in the legal documents and is to be applied
when the customer to whom finance has been accommodated defaults, or any
dispute arises and the case goes into litigation. SMR shall be advised by CRMD
from time to time, keeping in view the changing scenarios.
6.1.12 Timely Payment Rebate (TPR)
It is the mark–up rebate rate, to be calculated as under:

TPR = SMR – TPMR
6.1.13 Repayment Reminder
Where principal and/or mark-up due from customers / borrowers is not received
on due date / quarter-end, a letter should be sent to client immediately but not
later than 5 working days from the due date. Specimen of repayment reminder is
available at appendix I to chapter 4.6.
6.1.14 Mark-Up Recovery Frequency for Short Term Loans
Recovery frequency on different short term lending products:
Products Recovery Frequency

Quarterly for all other Running Finance
facilities. Monthly for consumer finance
Running Finance
products: Credit Cards and Business Sarmaya
(i.e. Equity Unlock through mortgage) only.
To be recovered proportionately at the time of
the adjustment of each tranche / bill and also
on balances outstanding at quarter ends
Where mark-up at the quarter end have been

Cash Finance (CF) / Finance Against Imported fully recovered, the proportionate mark-up at
Merchandise (FIM) / Finance Against Packing the time of subsequent delivery shall be
Credit (FAPC) / Finance Against Foreign Bills calculated from the date succeeding the quarter
(FAFB) / Finance Against Trust Receipt (FATR) up to which mark-up have been fully recovered
instead of from initial date of advance.
For Corporate Large Customers mark-up on

Cash Finance / FIM / FATR / FAPC may be
recovered on quarterly basis only.
Foreign Currency Import Finance Upon maturity of each tranche
Foreign Currency Export Finance Upon maturity of each tranche
Export Refinance pre-shipment / post-shipment Quarterly / as per SBP directives
Export Refinance P-II Quarterly / as per SBP directives
436
Note: Re-setting of KIBOR must be done according to the agreed / matching KIBOR
tenor which ranges from one week to three years.
6.1.15 Term Loans
Methods of calculating Purchase Price:
Traditional Method
Example:
Amount of Loan Rs.100,000

Tenor 4 years
Grace Period 6 months
Principal Repayment 7 equal half yearly installments
Mark-up Repayment Half-yearly
Mark-Up Rate (TPMR) 6 MK + 3 %
SMR 20 %
Sale price is supposed to be calculated at the Standard Mark-up Rate.
Principal Balance Mark-up @ 20

SN Date Sale Price
Repaid Amount %
(1) (2) (6) = (3) + (5)
(3) (4) (5)
01 01.01.2007 100,000
02 30.06.2007 100,000 9,918 9,918
03 31.12.2007 14,286 85,714 10,082 24,368
04 30.06.2008 14,286 71,428 8,548 22,834
05 31.12.2008 14,286 57,142 7,202 21,487
06 30.06.2009 14,286 42,856 5,667 19,953
07 31.12.2009 14,286 26,570 4,321 18,607
08 30.06.2010 14,286 14,284 2,635 16,921
09 31.12.2010 14,284 0 1,440 15,724
Annuity Method
Under the percentage method, mark–up is calculated by directly applying Mark-up

rate on the principal amount outstanding at the year or quarter or month-end, as
the case may be.
– n*m
Formula F = A 1– ( 1 + i/m )
i/m
Where the data is the same as in previous example:

Annual Mark –up rate 16 %
I = Rate of Mark–up = Number of = 4 = 0.04 ≅ 4%
installments in a year quarters
A = Installment amount = ?
437
100,000 = A –8
1– ( 1 + .16/4)
.16/4
100,000 = A 1 – (0.7307)
0.04
100,000 = A 6.733
100,000
A =
6.733
A = 14,852
Finance/ Principal Amount (A) 100, 000
Add: Mark-up 18, 816
Sale Price (A + B) 118,816
If we follow half yearly installments, following procedure may be used,

100,000 = A –4
1– (1 + .16/2)
0.16/2
1 – (0.735)
0.08
100000 = A (3.312)
= 30,192
Finance/ Principal Amount (A) 100,000
Add: Mark-up 20,768
Sale Price (A + B) 120,768
All installments having any frequency may be calculated through same formula.
Annual interest rate (i) must be divided by number of installments in a year (m) and
finance period (n) must be multiplied by number of installments in a year, so that
rate and period may be presented on yearly basis.
Annuity Based Method: Quarterly Schedule
Mark-up
Portion of Net
Financing sum Installment c = a ¯ 16
Finance Financing
Date at start of period % p.a.
Recovery sum at end
(a) (b) (4% per
d = (b – c) (a – d)
quarter)
31/03/01 100,000 14,852 4,000 10,852 89,148*
30/06/01 89,148* 14,852 3,566 11,286 77,862
30/09/01 77,862 14,852 3,115 11,738 66,124
31/12/01 66,124 14,852 2,645 12,207 53,917
31/03/02 53,917 14,852 2,157 12,695 41,222
30/06/02 41,222 14,852 1,649 13,203 28,019
30/09/02 28,019 14,852 1,121 13,731 15,288
31/12/02 15,288 14,852 565 15,287 0
118,816 18,816 100,000
438
6.1.16 Periodic Calculation of Mark-Up Income and Annualized Mark-Up Rate
Mark–up income should be accrued at each quarter end by applying the

appropriate Mark-up rate on the outstanding principal amount. The Timely
payment mark-up rate (TPMR) shall usually be used for such accrual. The TPMR
shall be the normal mark-up rate as approved by credit approval/ review authority
or as per latest circulars/ pricing grid.
6.1.17 Mark-Up Calculation on Classified Advances - Non-Performing Loans
• As per Prudential Regulation # 8 unrealized Mark-up on classified accounts

cannot be credited to Income account. Any mark-up accruals shall be reversed
and a memorandum record shall be maintained.
• No accounting entry shall be passed for mark–up on any advances classified as

under the Prudential Regulations of State Bank of Pakistan. Thus, no amount
will be taken to Mark-up Income A/c. Moreover, any unrealized mark-up taken
to Income account prior to classification shall also be reversed.
• However, Branches will calculate the mark–up on each classified advance every
quarter and note the same in a separate column on each loan sheet as a
memorandum record, along with the unrealized mark-up for period prior to
classification reversed as per above.
• Mark-up shall be calculated in terms of CRMD circulars issued from time to

time.
439
6.2 Funded Facilities

6.2.1 Funded Facilities – PKR
6.2.1.1 Running Finance

6.2.1.2 Cash Finance
6.2.1.3 Demand Finance / Term Finance
6.2.1.4 Payment Against Documents
(PAD)
6.2.1.5 Inland Bills Purchased (IBP)
6.2.1.6 Finance Against Imported
Merchandise (FIM)
6.2.1.7 Finance Against Trust Receipts
(FATR)
6.2.1.8 Finance Against Foreign Bills
(FAFB)
6.2.1.9 Foreign Bills Purchased
6.2.1.10 Finance Against Packing Credit
6.2.2 Funded Facilities – Foreign Currency
6.2.2.1 Foreign Currency Import

Financing
6.2.2.2 Foreign Currency Bill Discounting
6.2.2.3 Foreign Currency Export
Financing
6.2.3 Funded Facilities – SBP Schemes
6.2.3.1 SBP Export Re-Finance Scheme

6.2.3.2 SBP LTF-EOP Scheme
6.2.3.3 Other SBP Financing Schemes
440
6.2.1 Funded Facilities - Pak Rupees
6.2.1.1 Running Finance
Concept
Running finance facility is provided to a customer by way of allowing withdrawals
from the Current Account in excess of the credit balance, maintained by the
customer with the Bank.
The account is allowed to be operated freely by way of multi-transactions, provided

that the sanctioned limit is not violated and the account is operated strictly in
accordance with the approved terms and conditions at all times. However, borrower
is required to adjust the finance provided by the Bank within the stipulated expiry
period (normally once a year) as per clean up requirement.
Special Precautions
It should be ensured that:
• Running Finance facility is not being used for long-term financing needs. In this
respect, the financing needs of a borrower should be ascertained with regard to
its seasonal cycle / cash flows.
• Current utilization level must be constantly monitored to ensure that the credit
limit is not breached.
• The customer is compulsorily required to make complete adjustment of finance

at least once a year, with minimum clean up period of three consecutive days,
within expiry period of the approved limit. Clean up period may be increased by
relevant credit sanctioning authority depending upon business nature of the
customer (i.e. cyclical industries). Annual cleanup is not mandatory if 100%
Cash/Near Cash security held as collateral. However, markup must be paid as
and when due.
• Waiver of clean up requirement of RF facilities can be allowed at the original

approval/ review level, provided that the customer operates in the sectors that
operate round the year and either of the following conditions is complied with;
o Credit turnover of the account (during validity of limits) is equal to at least

four times of the approved RF line; or
o Clean up of up to 75 % of the RF line is achieved during the year for a

consecutive period of three days.
• Waiver for cleanup requirements can also be allowed at original approval/

review level for clients undertaking trading activities (where no manufacturing
and or value additions is involved) provided that either of the following
conditions are complied with
o Credit turnover of the account (during validity of limits) is equal to at least

six times of the approved RF line; or
441
o Clean up of up to 75 % of the RF line is achieved during the year for a

consecutive period of three days.
• However, in following cases, the waiver for cleanup requirement can be allowed
at the level of GH – RMG;
Client operating in textile sector (including cotton ginning, but excluding

the finished sub-sector) sugar & rice husking sectors.
Clients that are operating in more than one sector, if any of its business
activities falls within those businesses which are not covered for clean-
up waiver above.
For all other clients which are not covered above.
• Compliance with the above requirements should be properly documented with

appropriate bank statement.
• Charging of mark-up on mark-up is prohibited under NIB system.
• No disbursement shall be allowed against expired limit.
• The finance shall be disbursed to the customers after taking into account their
drawing power.
• Drawing power to be calculated on the basis of stipulated margin required to be

maintained on the security (at least primary) as per approval terms.
• In order to safe guard the bank’s interest and avoid the business risk i.e.
shrinkage in value of security, it must be ensured that the stipulated margin
covers at least one quarter mark-up (at SMR) at all times.
• Adequate insurance, as appropriate, covering assets charged in Bank's favour

should be obtained/ arranged.
Note: Where one year limit stipulates that mark-up shall be paid at every quarter
end, then for facility availed on 1st January, the mark-up at the end of January
and February shall accrue but would not be payable / due for payment. It shall
become due for payment on 31st March along with mark-up for the month of
March.
Application Policies
The Running Finance facility should be sanctioned / renewed in a manner that the
expiry date of such financing would fall at the end of calendar quarter.
442
Possible Security Structure
Primary Security
• Hypothecation over Current Assets (Sole proprietorship/Partnership) / Charge
over Current Assets of the Company (for Private & Public Limited Companies as
per requirements of Companies Ordinance 1984).
• Pledge of Shares.
• Pledge / lien over cash/ near cash security
Secondary Security
• Registered / Equitable Mortgage of Fixed Assets

• Charge on Fixed Assets of the Private and Public Limited Companies as per
requirements of Companies Ordinance, if the fixed assets are in the name of
the borrowing company.
• Hypothecation of Plant and Machinery
443
6.2.1.2 Cash Finance
Concept
Cash Finance is a facility where an amount is disbursed against pledge of local /

locally procured goods and / or merchandise. The amount after retaining the
prescribed percentage of margin on stocks is transferred in a separate C/F account
of the customer. Delivery of pledged stocks is allowed on repayment of finance
along with markup for relevant tranche.
Special Precautions
• Proportionate mark-up has been recovered at the time of issuance of each

Delivery Order (DO) and at quarter ends, whichever comes earlier.
• Each tranche is adjusted within 90 to 180 days or as per approved terms (tenor
of tranche may vary depending upon the seasonal financing requirements).
• Each tranche must be adjusted within the stipulated timeframe. Relevant

Credit Approval Authority within the business group, capped at Business
Group Head (without counter sign of Credit Review Authority) may allow
relaxation of another 5 days provided there are due justification for the same.
• For each transaction, it must be ensured that pledge of fresh stocks is provided
by the borrower. In order to confirm the same purchase invoice showing recent
date of purchase must be obtained.
• However, in case of a debt swap transaction (i.e. taking over of stocks already
pledged with any other bank); total tenure of the pledge including the period
respective stocks remained pledged with other banks must not exceed the
stipulated / approved pledge tenure for a specific borrower.
Goods pledged are required to be kept in the Bank’s effective control under lock
and key and under Bank’s nominated Muccadum. Open pledge to be allowed with
specific approval from competent credit approval/ review authority.
Approved Muccadums are hired and deputed, in accordance with Bank’s

Muccadumage policy, as well as various circulars issued by CRC/CRMD.
Draw down is allowed on receipt of goods for pledge. Drawing power is to be

determined, based on value18 of goods placed under pledge along with stipulated
margin. Finance is recovered on each delivery. Each drawdown is required to be
adjusted within the stipulated period (generally 90 to 180 days) along with
proportionate mark-up.
18
The value of goods is determined on the basis of the benchmark price determined by CRC. If no benchmark
price is determined, invoice value should be used.
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Rollover can be allowed against fresh stocks only. Any exception shall be approved
at original approval/ review level. Fresh accounting entries shall be passed in this
case.
Primary Security
Pledge of local / locally procured goods and / or merchandise.
Secondary Security
In order to avoid the possibility of shrinkage in value of pledged stocks in worse

cum worse scenario, tangible collateral must be obtained.
In case of private & public limited Companies it must be ensured that in addition
to the pledge of stocks, a ranking charge over Current Assets of the Company must
also be arranged (other than pledged stocks).
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6.2.1.3 Demand Finance / Term Finance
Concept
Under this type of facility, finance is allowed to the borrower for a fixed period
usually exceeding one year, repayable either in periodic installments or in lump
sum, at a future date.
This type of finance is of non- revolving in nature. The primary purpose is to

finance Fixed Assets such as Plant and Machinery, Land, Building, etc. with core
analysis to focus on forecast for future years.
Possible Purposes for Obtaining Term Loan
• New / Fresh Project: Green field project with no existing operations.
• Expansion: Increase in existing production / operation capacity.
• Balancing, Modernization & Restructuring (BMR):
o Replacement of existing old / obsolete machines with new ones.
o Adding back process / other machines in existing production line to improve

balance.
• Financing financial mismatches: Long Term needs being financed through short
term sources.
• The demand finance facility may also be created as a consequence of loan

rescheduling or as a consequence of forced financing.
Key Consideration for Approval of Term Loans

Understanding Borrower’s Operations
Production/ Manufacturing Process:

• What are major raw material / inputs?
• What is the end product?
• Stages of production
Example
Textile Weaving Unit:
• Input: Yarn
• End Product: Grey Fabric
• Stages of Production:
o Back Process: Warping, Sizing
o Main Process: Looming
Plant & Machinery Details:

• Production Capacity
• Make, Model, Year of Manufacturing
• Technology
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Example
• Textile Weaving Unit:
o Make of Looms (Japanese / others)
o New or second-hand
o Air-Jet or Projectile
Understanding Borrower’s Industry
• Forecast finished Product’s Demand during tenure of the loan.

• Forecast availability of raw material.
• Forecast unit price of finished goods and inputs during the tenure of the loan.
• Foreseeable Regulatory environment.
• Forecast competitive environment of the industry and customer’s market share.
Comparison of Cost with Peers
• Cost of other similar projects that bank has financed.

• Independent market checks.
Credit proposal shall cover following critical areas
A. Project Cost
• Complete cost of the project being financed by the bank to be provided with the
proposal. This cost should explicitly highlight bank’s financed portion.
• Proposal should contain detailed stage wise and asset wise (i.e. land, building,
machinery and initial working capital) breakup of cost. Determining a
reasonably accurate cost estimate is important to ascertain the loan size and to
ensure proper utilization of funds.
B. Identification of the Project
• Stage wise project completion schedule along with key milestones and
respective timelines to be provided.
• MCB’s funds disbursement pattern
C. Financing Source for CAPEX
• Complete project cost and its financing plan to be submitted along with explicit
calculation of following ratios,
¾ Total Debt : Equity
¾ Project LT Debt : Equity
• Equity to be contributed in what form (i.e. cash, land etc.)
• Debt to finance which assets (i.e. land, building or machinery)
D. Projections
Projections covering entire duration of the loan shall be submitted along with CP.
Purpose of obtaining projections is:
447
• To estimate the borrower’s ability to repay loans

• Establish Loan Structure
• Identify suitable covenants
E. Disbursement and Repayment
• Availability period to be determined and provided

• Grace period, if required, to be provided
• Principal repayment schedule shall be made part of the proposal and approval
Types of Term Finance
• Demand Finance - Fixed Assets Finance (DF-FAF)

Security: Charge over fixed assets (land, building, machinery) / mortgage of
fixed assets (land & building)
• Lease Finance (LF)

Security: Ownership of fixed asset usually machinery / vehicle(s)
Types of Lease Finance
• Direct Lease
• Sale and Lease-Back
Special Precautions
• The security possessed is commensurate with the terms of finance.
• Where the installment payment is delayed, additional mark-up is charged for

the delayed period, unless approved otherwise.
• Delayed payment of installments is carefully monitored, followed up and

reported to the senior management.
General Conditions for Term Loans / Lease Finances
• Any cost overruns/ contingencies of the project will be met by the borrower
from its own sources and no further finance will be allowed by the bank.
• Sponsor’s / Director’s loans shall always remain subordinated in favor of

Bank’s loan and shall not be repaid during currency of our financing. Necessary
subordination agreement to the effect must be executed.
• Sponsor’s / Director’s loans shall be interest free.
• No long term financing from any other Bank/DFI will be obtained without prior
written approval of the MCB.
448
• Undertaking from Suppliers of machinery / equipment must be obtained that

machinery / equipment being imported is brand new and its estimated useful
period of working is at least ten years.
• The Sponsors will not dispose off / transfer their shareholding and/or transfer
management of the Company during tenure of finance without prior written
approval from the Bank.
• Bank’s financed assets should always remain identifiable / segregated from

overall project.
• Non-payment of any single installment towards due obligation (Principal as well

mark-up) will classify the exposure as "Default".
• In the event of any single default of the contractual obligation, Bank reserves
the right to commission a special cost & management audit by a firm of
auditors of bank's choice at borrower's cost.
• Material Adverse Clause
• Cross Default Clause
Post Disbursement Monitoring
• In all cases where long-term facilities are being availed by customers along-with
short-term / working-capital facilities, annual review of CPs for short-term /
working-capital facilities must include all long-term facilities for review.
• In all cases where customers are availing only long-term facilities, CPs for only
long-term facilities should invariably be put-up for annual review.
In all such cases, the Credit Proposals accompanied by revised projections for
the remaining tenure of the long-term facilities should be elevated up to the
level of the Sanctioning Authority or Group Head Risk Management, whichever
falls earlier in the Credit Approval / Review Authority chain.
• Regular plant/ site visits shall be conducted by the concerned business officials
and recent visit report shall be submitted to approval/ review authority at the
time of review.
Business Units shall submit comparison of Projections with actual numbers.

• Identify reasons for deviation from projections, if any, whether negative or
positive.
• Analyze Bank’s risk in terms of changing scenarios.
• Devise account strategy.
• Moreover, revised projections shall be submitted, in case there is a material

change in operational and /or financial standing of the project.
449
(These above mentioned monitoring aspects should also be observed in

Infrastructure Project Finance)
Primary Security

requirements of Companies Ordinance, if the fixed assets are in the name of the
borrowing company.
• Any other security acceptable to bank.
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6.2.1.4 Payment Against Documents (PAD)
Concept
• PAD (Payment Against Documents) is not a regular lending facility, rather, it

arises when the Bank receives documents under a Letter of Credit issued by the
bank and makes payment against the documents. The importer enters in buy
back agreement with the bank at the time of submitting request for opening of
LC. Bank’s prescribed LC request Performa (i.e. IB-8) also serves as buy back
agreement.
• Afore mentioned arrangement binds the importer to meet the obligation to

purchase the import documents at Marked–up Price (purchase price). The
import documents, as per Mark–up Agreement, would be purchased by the
Bank for the amount of finance and sold to the importer at the Marked–up
Price.
• When an import bill is received and lodged, two types of transactions shall be
deemed to have taken place; purchase and sale of import documents.
• Retirement occurs when the importer receives the documents from the Bank
and pays the bill amount along-with mark-up. The same may also be affected
through available / approved limit. In case of sight LC, approved limit may be
Finance Against Imported Merchandise (FIM) or Finance Against Trust Receipt
(TR). In case of Usance LC, it may be DDAA line.
• Sometime, customers have approved DDAA line but do not provide funds at the
time of maturity of DA bills. Then bank shall make payment against the bills at
maturity and create Forced PAD.
Special Precautions
• In some cases, the customers do not provide necessary funds for retirement of
sight LCs / DA bills on maturity, as a result of which the Bank is compelled to
book PAD / Forced PAD (respectively) to honor the import bills. Considering
this situation and for discouraging such customers who do not manage their
finances properly; following instructions are to be complied with:
o The branches are restricted from granting DDAA (Delivery of Document

Against Acceptance) facility to such customers. Therefore upon creation of
forced PAD/FIM for the first time in a year, the branches need written
clearance from Regional Manager / General Manager where such forced
financing has occurred and for the second and third time from original
approval/ review authority. If the forced financing is not settled within 30
days, then the General Manager should report the matter directly to
respective Group Head for seeking further course of action.
o The branch should not allow the opening of new Letters of Credit to
customers having overdue / forced PAD without approval from relevant
credit approval/ review authority (to be capped at the level GH – RMG).
451
It is strongly recommended that once the documents are received by the

Bank from the correspondent Bank and the customer does not come
forward to have the goods cleared and retire the documents, the concerned
official should take steps to transfer the facility from PAD to Forced FIM.
• As soon as the documents of import bills are received, these should be

scrutinized in accordance with the TSC’s procedural manual.
• PAD should be created in case of Sight L/Cs only. In case of usance import
bills, if the customer does not make payment at maturity date, the branch
should create Forced PAD (Usance Bills Unpaid).
• Classification of Advances, where applicable, is to be done strictly in accordance

with period specified in Prudential Regulation. The trade bills are required to be
classified as loss directly if overdue by 180 days.
• Branch should keep themselves abreast of whereabouts of goods and obtain

storage certificates, where applicable.
• Mark up on PAD/ forced PAD shall be recovered/ charged as per CRMD

circulars/ Bank’s schedule of charges as issued/ amended from time to time.
Primary Security
• Lien on import documents
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6.2.1.5 Inland Bills Purchased (IBP)
Concept
This type of facility is created when the Bank purchases the goods (documents of
title to goods) from the drawer (seller) of the bill and sells the same to the drawee
(buyer), both located within the country. Bank acts as an agent of the drawer
under an agreement with the drawer that he will repurchase it back from the
Bank, if drawee would not promptly retire the bill.
Normally, the facility shall be extended after receiving acceptance of the drawee’s
bank. However, the same may be extended for selected customers on pre-
acceptance basis, in case of clean export documents.
IBP facility shall not be extended against discrepant documents (or documents
arranged against firm order). On exceptional basis, explicit approval shall be
obtained from relevant approval/ review authority. The facility shall be extended
after ensuring adequate collateral arrangements.
An Inland Bills Purchased facility should be extended on the basis of Mark–up /

Mark–down system. The concept / working of this system is explained hereunder:
Mark-up
This mode of financing would be applied only in case where Bank charges are to be
recovered from the drawee i.e. the correspondent bank will honor the payment of
the bill of exchange. Mark up shall be charged/ recovered as per CRMD circulars/
Bank’s schedule of charges/ latest approved pricing grid, as issued/ amended from
time to time.
Mark-down
This mode of financing will be applied only when the Bank charges are recoverable
from drawer. Commission + Mark-down for 20 days (in case of sight bills) / up to
maturity period (in case of usance bills) shall be recovered upfront. Customer gets
Bill amount less Commission / other charges, Mark-down amount and margin (if
any), while finance is booked at Bill amount. Mark-down to be recovered upfront
and recorded as liability under “Mark-up recovered in advance”. This liability is
accounted for as Mark-up income on realization / adjustment or on quarter ends,
whichever is earlier.
Where bill amount is not realized within above period, Mark-down will be charged
at the higher rate as per CRMD circular (to be amended from time to time) and in
that scenario difference amount will be recovered from the client i.e. difference
between normal mark-down rate (recovered on an upfront basis) and the overdue
mark-down rate.
Special Precautions
Among the normal precautionary measures to be taken by Branch Manager, while

allowing this facility; the following are particularly important:
453
• Reports on the credit worthiness of the drawee / drawer of the bills should be
solicited from their bankers. Upon obtaining such reports, they should be
closely examined. Even the slightest adverse indication in any of these reports
should immediately be brought to the notice of the approving authority.
• Proper consideration as to the type or quality of the goods, if any, covered under
the bills.
• Adequate security/margin should be obtained to minimize Bank's risk of

lending against the security of the bill.
• Total value of bills outstanding within the approved limit is to be carefully

assessed.
• Finance outstanding for an abnormal period is to be examined / investigated,

including bills that have matured but have not been paid.
• Bank's legal title to the goods, if any, covered by the inland bills should be
verified. Transport documents should usually be made out in the name of the
drawee’s bank.
• Goods consigned under the bills presented should be insured in favor of the
Bank at the expenses of the customer (the drawer) against pertinent risks,
including fire, theft, riot, civil commotion and any other risk, as may be
required.
• In case of documentary Letters of Credit, the terms of Letters of Credit,

including transportation requirements should be followed.
• Exposure to be booked after receipt of acceptance from L/C opening bank ,

however pre-acceptance exposure can be booked subject to the condition that
Documents must be clean i.e. fully comply with terms & conditions
incorporated in the LC.
• Facility may be extended to MCB customers only (who may or may not have
borrowing relationship with the Bank). In case a customer does not have a
borrowing relationship with MCB, name clearance shall be obtained from
relevant the Business Group Head on one time basis. No formal credit
approval/ review shall be required for such requests.
a. Inland bills drawn under DA/Usance LC of any customer shall be

purchased/discounted, subject to the following conditions:
Receipt of authenticated acceptance from LC issuing Bank / DFI. Rating

of bank should be as per under-mentioned table.
FI clearance and limit allocation on case to case basis by Financial
Institutions & International Division (FIID), which should be in place
upfront.
454
b. Joint approval on transaction basis should be obtained from the following

authorities for CBBG and WBG customers as follows:
For CBBG Customer:

1-Head TFD
2-Credit Head CBBG
For WBG Customers:
1-Division Head TPD
2-Group Head WBG.
c. Pricing shall be as per the latest approved Pricing Grid.
d. The discounting shall be as follows:
- On mark-down basis (i.e. discounting charges shall be recovered upfront)-

if discounting charges are on account of LC beneficiary.
- On mark-up basis – if discounting charges are on account of LC applicant.
e. Trade Service Centers (TSCs) shall be responsible for handling all operational
requirements including but not limited to obtaining authenticated
acceptance from LC issuing bank.
f. All KYC and AML formalities on client shall be the responsibility of the
concerned Branch.
g. Agreement for Discounting / Purchase of Bills (IB-20) shall be obtained in all

the cases.
Transfer of exposure to Banker’s Acceptance

• Outstanding against Inland Bills Purchased (IBP) facility may be excluded from
customer’s exposure subject to following:
o Receipt of authenticated acceptance from inland LC opening Bank rated by

Standard & Poor, Moody’s, Fitch Ibca, Japan Credit Rating Agency (JCRA) or
credit rating agency on approved panel of State Bank of Pakistan as under:
Aggregate amount of
bill(s) Minimum rating of the
Maturity of the bill(s)
purchased/discounted L/C issuing and accepting
purchased/discounted
on account of one banks/DFIs
person
a) Short term (not more Up to US$ 250,000 No restriction
than 1 year)
b) Short term (not more More than US$ At least “BBB” and above
than 1 year) 250,000
c) Long term (more than -Any- At least “A” and above
1 year)
455
The export bills shall be converted into equivalent USD using ‘Ready’ rates
as per “Exchange rates for mark to market revaluation by Authorized
Dealers in foreign exchange” sheet – which is updated daily and is available
on SBP website.
o Approval from FIID (Financial Institution & International Division). Upon

receipt of authenticated acceptance from inland LC issuing bank, branches
shall approach FIID for limit allocation against the inland LC issuing bank
on case to case basis. FIID’s approved shall be held on record. Following
FIID’s approval, customer exposure may be transferred to ‘Banker
Acceptance – IBP’.
• In case the LC opening customer and the LC beneficiary are related parties then
bank may be at a risk of being exposed for money laundering and even a
fraudulent activity may take place. Branch/ Relationship manager has to show
extra vigilance while purchasing/ discounting the bills of such parties. Buyer
and seller, though related, their credit report shall be obtained separately form
their bankers/ ICIL. All the aspects of AML and KYC policy be religiously
followed and customer should be tested on a scale of EDD (enhanced due
diligence). The customers may also be requested to submit a certificate of credit
history from their previous bankers stating their credit worthiness and also
submit a certificate of membership from a trade body. Also, the transaction
should be consistent with the customer's profile / usual course of business.
Non-Payment of Bills
In case the bill is not paid-off in 30 days, the drawee Branch would either return
the bill or seek further instructions through TCD from the drawer branch. In the
event of the relative bill is returned to the Drawer Branch, the following procedure
shall be followed:
Drawer Branch may face two situations:
• The drawer of the bill may have a credit balance in the account.
• The drawer of the bill may have a debit balance in the account.
If there is sufficient balance in the Drawer's Account, outstanding amount is to be

recovered from the same.
If there is a debit balance in the Drawers Account, outstanding bill amount is to be

transferred to Unpaid IBP A/c and the drawer should be intimated immediately
and should be asked to arrange for sufficient funds in his Account for adjustment
of Unpaid IBP. Proportionate rebate would be given to Party for earlier adjustment
of account. Disposal instructions regarding the bill should also be obtained from
him.
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IBP against deferred payment LC
IBP may be allowed against “Deferred Payment / Acceptance” type LCs which shall
be considered at parity with remaining LC types provided following guidelines are
meticulously followed.
1. The document forwarding covering schedule of MCB, for all export documents
drawn against Deferred Payment/Acceptance type LCs will explicitly mention
the following clause:-
“We have honored documents valuing __________ (value and currency of the
documents) against your LC number _______________.”
2. Clean Export Documents
In case clean documents are presented by the exporter for prepayment/purchase

under “Deferred Payment” type unrestricted LC, MCB will incur “Deferred Payment
Undertaking” and may prepay (as per usual procedure for creating FBP / FCBD
etc.) under approved customer limit. The document forwarding schedule of MCB
shall explicitly mention the following clause:
documents) against your LC number _______________ and the beneficiary has
been prepaid “
3. Discrepant Export Documents
In case discrepant documents are presented by the exporter to MCB under

“Deferred Payment” type LC, any one of the following may be adopted:
a. Exporter may be prepaid by booking the exposure under customer’s

approved discrepant documents line, if available.
b. Dispatch the documents to the LC issuing bank and upon receipt of

authenticated acceptance of the discrepancies / “Deferred Payment
Undertaking (due date confirmation )” from the issuing bank, exporter
may be prepaid after giving an explicit notice to the issuing bank
regarding incurring “Deferred Payment Undertaking” and prepayment to
the beneficiary against “Deferred Payment” LC.
4. Banker Acceptances
In either of above cases (2 or 3) exposure may be moved to bank risk under

“Banker Acceptance” upon receipt of deferred payment undertaking of the issuing
bank containing a definite maturity date subject to the condition that all
instructions in the Credit Handbook (as amended from time to time ) are
meticulously complied. i.e.
a. Receipt of authenticated acceptance/deferred payment undertaking from

LC issuing bank (rating of the bank as per above mentioned table).
457
b. Approval and limit allocation from FIID (Financial Institutions &

International Division) to be obtained on case to case basis.
Primary Security
• Lien on Export documents
Secondary Security
• Hypothecation over Current Assets (Sole Proprietorship/Partnership) / Charge

over Current Assets of the Company (for private & public limited Companies as
• Pledge / lien over cash/ near cash securities
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6.2.1.6 Finance against Imported Merchandise (FIM)
Concept
Under the Finance against Imported Merchandise (FIM), financing shall only be
made available on the basis of mark-up for imported goods against Letters of Credit
established and goods pledged with MCB. The imported goods are to be pledged
with MCB and the borrower is required to get each consignment released within a
specified period, but not exceeding 120 days.
Financing under FIM may be allowed in following situations:
• The importer has a regular FIM limit for financing of import value of
goods/custom duties/ government dues, or both.
Financing of custom duties and government dues should be discouraged and

FIM should be allowed to finance the imported goods preferably at invoice price
rather than at landed cost.
However, incase client requests for financing at landed cost, specific approval
must be obtained from the relevant credit approval / review authority.
• This specific form of facility may be sanctioned in following circumstances,
¾ Importer is unable to dispose of the goods immediately and these shall be

sold / consumed over a period of time;
¾ Collateral provided seems to be relatively less liquid and it becomes
imperative to retain the stocks as security;
¾ Given the risk profile of the customer; it becomes necessary to allow sale
/ consumption of goods to importer after payment of bank’s finance;
¾ Importer business activity shall not be disrupted, if goods are released in
piece meals. This is more relevant for manufacturing processes/
businesses.
• Sometime bank has to create FIM in order to clear consignment. Such facilities
are treated as forced FIM. Deliveries to importers under forced FIM should only
be allowed upon payment and after seeking approval from competent authority.
Special Precautions
• Margin should be recovered from the importer at prescribed rates subject to

SBP restrictions.
• The application for FIM facility is scrutinized in the normal way like any other
advances facility, with emphasis on the following matters:
o Credit worthiness of the customer.
o Profit and income generating capacity of imported merchandise.
o Marketability of product to be financed.
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o Margin should be recovered from the importer as prescribed in Sanction

Advice.
• Due consideration must be given to the nature of imported commodities while

structuring tranche adjustment tenure. If the goods are not sold / consumed
within their life cycle, their condition may deteriorate and they may become un-
saleable or sold at a discount. Moreover, goods must not be perishable.
• Margin should be imposed based on the risk associated with the sale ability or
perish ability of the goods.
• Additional care shall be exercised while financing those goods whose

measurement and valuation is difficult (i.e. coal, concrete, unpacked grain,
timber, stone, scrap from ship breaking etc). Pledge of such commodities shall
be allowed only to top tier customers.
• The facility to be allowed against goods imported through MCB only.
• Where FIM facility is allowed to the customer, after consent of the customer,
documents shall be handed over to bank’s approved clearing agent for clearing
of the consignment and delivery of goods to pledge site. FIM shall be booked by
adjustment of PAD after receipt of goods at the pledge site and confirmation of
bank’s muccadum of receipt of goods. Till such time entry shall remain in PAD
and relative mark-up shall be charged. Normal markup rates may be allowed
for this period, to the customer subject to approval from the relevant authority.
It must also be ensured that proper margin requirements shall be observed at
various stages of facility.
• The warehouse may be owned or rented by the customer, but goods stored
therein shall remain in the bank’s custody under approved Muccadumage
arrangement.
• Goods shall only be released to the importer by issuing delivery order

instructing the Muccadum to release the goods bank has recovered principal
and markup related to that particular tranche of goods.
• The delivery order must specify detail of goods to be delivered (consignment /

batch, serial identification numbers of either the goods or the packages
containing those goods, their quantity and monetary value)
• Each tranche must be adjusted within the stipulated timeframe, however,

Group Head or relevant Credit Approval Authority within the business group
(without counter sign of Credit Review Authority) may allow relaxation of
another 5 days provided there is due justification for the same.
• However, in case of a facility is made available by the Competent Authority (i.e.

GH RMG) to finance the goods imported through other banks also, following
procedure must be strictly followed:
o Payment must be made directly to the L/C Opening Bank.
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o Bill of Entry should not be more than 30 days old.
o Total tranche of FIM including the bill of entry period should not exceed the
approved tenor.
Mark-up Agreement
The Mark-up Agreement should be executed for the Sale Price of the goods (i.e.
Marked-up price) which should be specific and should comprise of the following:
• Amount of PAD.
• Add amount of unpaid Mark-up on PAD (to be transferred to Mark-up

Recoverable A/C FIM).
• Preferably client must be insisted to settle / adjust the Mark-up due on PAD
prior to initiation of FIM.
• Add amount of duty, sales tax, surcharge, demurrage, etc.
• Add Mark-up for validity of limit, at SMR.
Bank financing means PAD amount transferred to FIM plus duty, sales tax,
surcharge.
Primary Security
Pledge of imported goods/ merchandise.
Secondary Security
In order to avoid the possibility of shrinkage in value of pledged stocks in worst

case scenario, tangible collateral must be obtained.
In case of Private & Public Limited Companies it must be ensured that in addition
to the pledge of stocks, a ranking charge over Current Assets of the Company must
also be arranged (other than pledged stocks).
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6.2.1.7 Finance Against Trust Receipts (FATR)
Concept
The facility is allowed by way of releasing title documents (related to goods)

arranged against sight letter of credit to importers after they sign ‘Trust Receipt’.
TR is an evidence of the fact that customer is getting custody of the goods as
‘trustees’ of the bank and not as owner of the goods. This post import facility
enables the importers to obtain delivery and custody of goods and arrange to retire
the bill out of the sale proceeds of those goods.
The documents of title are delivered against the customers' signature on the
prescribed Trust Receipt form/related security documents. Thus the borrower is
bound under legal obligation to pay the outstanding out of the sale proceeds of the
relevant goods and before the sale, the Bank has lien over goods held by customer,
which are released by Bank on trust to them. The facility implies that, customer
shall comply terms of the trust receipts executed at the time of obtaining title
documents (of goods) and promptly deposit sale proceeds of the goods with the
bank
Special Precautions
The bank should ensure that:
• Fund Based Finance against Trust Receipt should not be allowed under Usance
L/Cs. Facility is allowed against sight L/Cs only.
• This facility is for transaction under Sight L/Cs and is not allowed when a
customer has availed DA/DDAA facility and wishes to avail the facility by
making payment of DA bills through T.R.
• Although State Bank of Pakistan (SBP) does not compulsorily require obtaining
of collateral / securities in addition to Trust Receipts, however, in order to
ensure that the sale proceeds of the goods are deposited by the date stipulated
in the limit, proper collateral shall be obtained.
• Imported goods are directly released by the customer and moves directly to
customer’s godowns without involvement of bank’s approved clearing and
forwarding agent or muccadum.
• The Trust Receipt facility is allowed to top tier customers only. These customers
have an established good credit history with bank and are known not to have
financial problems.
• Theoretically, bank’s interest remains secure as long as goods are unsold. But
practically, field needs to understand the life cycle of imported commodities and
insist payment against imports after a reasonable time period. This requires
special care, particularly when imported goods have a short life cycle.
• Trust receipt facility is extended to the importer under following conditions,
462
o The importer is trustworthy and it is unlikely that the importer/

customer shall consume or sell the imported goods without payment of
proceeds to the bank;
o Importer’s business or manufacturing process necessarily requires
uninterrupted availability of the goods. The piecemeal release of goods,
as in case of FIM, may hamper customer’s business/ cash flows.
o In case importer in not cash enriched, but collateral provided contains
reasonable value and is readily marketable.
Trust Receipt Financing facility shall be granted for retirement of the following
documents / delivery of goods:
• Documentary bills (on DP basis) drawn under sight L/Cs (Foreign / Inland).
• Documentary bills (on DP basis) on collection basis.
The TR financing facility shall only be extended to such parties who have been
sanctioned limits under Trust Receipts. If limit is not available, separate approval
should be obtained from the relevant credit approval/ review authority.
This facility under TR financing will, normally, be for a maximum period of sixty
(60) days.
Each tranche must be adjusted within the stipulated timeframe, however,

relaxation of 5 days may be allowed by relevant approval authority (capped at
Business Group Head) provided there are due justification for the same.
Primary Security
• Trust Receipt
Secondary Security
• Hypothecation over Current Assets (sole proprietorship/partnership) / Charge

463
6.2.1.8 Financing Against Foreign Bills (FAFB)
Concept
Financing against Foreign Bills (FAFB) is a post – shipment finance facility, which
is allowed against export bills drawn under L/C and / or Firm Contract and are
sent for payment under documentary collection against DP / DA basis.
Documentary collection consists of export bills accompanied with documents
evidencing the shipment of goods. The facility is extended for exporters on post
shipment basis, whereby, customer arranges exports from own sources.
Subsequently, seeks finance from the bank against documentary bills drawn under
LC and /or firm Contract.
FAFB facility is primarily secured by a lien over the export bills that the exporter
draws on the importer after affecting shipment. The term "documentary bills" is
used for Bills of Exchange accompanied by the relevant documents of title to goods.
For bank’s perspective; repayment source shall be proceeds of the export bill. Bank
require lien over export bill to ensure recovery of export bill proceeds. Lien allows
the bank to use bill proceeds for settlement of the facility along with markup. Bank
has right to call upon the exporter to settle the facility from other sources, if bill
proceeds are not realized.
Since export documents have not been purchased by the bank and title of the asset
denominated in foreign currency is held with the customer. So, exchange rate risk
shall not be borne by the bank. In case of any adverse exchange rate fluctuation,
customer shall have to bear loss. If a bill is dishonored upon presentation /
maturity; the bank shall exercise its recourse to the exporter.
FAFB would normally be granted for a maximum period of 10 days in case of

Documents Against Payment (DP)/ Sight Export Bills and for tenure of the bill in
case of Documents Against Acceptance (DA) Bills.
Special Precautions
• Before extending FAFB facility, branch/TSC should obtain credit report of the
foreign buyer (importer).
• Branch/TSC should mark in bold letters on Export Bill File that FAFB finances
have been given by stating “CARE FAFB Rs._____________ allowed on
_____________”. This would ensure that export proceeds are utilized for
adjustment of financing facility.
Outstanding against export documents drawn under DA (usance) L/C of

international banks may be excluded from customer’s exposure subject to
following:
464
• Receipt of authenticated acceptance from LC opening Bank rated by Standard

& Poor, Moody’s, Fitch Ibca, Japan Credit Rating Agency (JCRA) or credit rating
agency on approved panel of State Bank of Pakistan as under:
Aggregate amount of
person
than 1 year)
1 year)
In case export bills are in currencies other than USD, in order to ensure
compliance with the above criteria, the export bills shall be converted into
equivalent USD using ‘Ready’ rates as per “Exchange rates for mark to market
revaluation by Authorized Dealers in foreign exchange” sheet – which is
updated daily and is available on SBP website.
• Approval/ Limit allocation from FIID (Financial Institution & International

Division). Upon receipt of authenticated acceptance from LC issuing bank,
branches shall approach FIID for limit allocation against the LC issuing bank
on case to case basis. Following FIID’s approval/ limit allocation, customer
exposure may be transferred to ‘Banker Acceptance’.
Treatment of Mark-up
Mark up shall be charged/ recovered as per CRMD circulars/ Bank’s schedule of

charges as issued/ amended from time to time.
Recovery of Income
Mark-up should be recovered at the time of each calendar quarter or on realization

of bill whichever is earlier.
Primary Security
Secondary Security

465

466
6.2.1.9 Foreign Bills Purchased (Negotiated Under L/C)
Concept
Exporters requiring funds immediately against their export bills drawn under LCs
(both Sight and Usance), approach the Bank who then negotiates / purchases /
discounts the bill and pay exporter the value in Pak Rupees. Export documents
arranged against firm order or contract cannot be negotiated / purchased under
FBP
In other words, negotiation of export bills drawn under L/C is Bank’s purchase and
claiming /obtaining reimbursement there against is Bank’s Sales.
From bank’s perspective, negotiation imbeds the risk of documentation errors, not
detected by the bill buying bank and non-realization of the bill.
The difference of exchange earning between purchases and sales of foreign

currency is bank’s profit, whereas in case of rupee bills, bank’s profit is in the
shape of negotiation commission.
However, it is a condition that all direct Bank expenses i.e. foreign correspondents
charges claimed by the opening Bank / Reimbursing Bank, if any, should be
recovered from the Exporters unless it is explicitly stated in the Letter of Credit
that the charges are on LC Opener's Account.
Special Precautions
• Branch/TSC should examine that all terms and conditions of L/C are duly
complied with.
• Negotiated documents obtained in no case should be handed over to the

exporter for the purpose of dispatch.
• Field is required to obtain adequate collateral, if realizability of the export bill is

questionable. This happens in case of negotiation of discrepant bills under LC
(Sight / Usance).
• Facility may be extended to MCB customers only (who may or may not have
borrowing relationship with the Bank). In case a customer does not have a
borrowing relationship with MCB, name clearance shall be obtained from
relevant Business Group Head on one time basis. No formal credit approval/
review shall be required for such requests.
a. Foreign bills drawn under DA/Usance LC of any MCB customer shall be

purchased/discounted, subject to the following conditions:
• Receipt of authenticated acceptance from LC issuing Bank / DFI. Rating

of the bank as per below mentioned table.
467
• FI clearance and limit allocation on case to case basis by Financial

Institutions & International Division (FIID), which should be in place
upfront.
b. Joint approval on transaction basis should be obtained from the following

authorities for CBBG and WBG customers as follows:
For CBBG Customer:

1-Head TFD
2-Credit Head CBBG
For WBG Customers:

1-Division Head TPD
2-Group Head WBG.
c. Mark up shall be charged/ recovered as per CRMD circulars/ Bank’s

schedule of charges/ latest approved pricing grid, as issued/ amended from
time to time.
d. Trade Service Centers (TSCs) shall be responsible for handling all operational
requirements including but not limited to obtaining authenticated
acceptance from LC issuing bank.
e. All KYC and AML formalities on client shall be the responsibility of the
concerned Branch.
f. Agreement for Discounting / Purchase of Bills (IB-20) shall be obtained in all

the cases.

following:
Aggregate amount of
person
than 1 year)
1 year)
468

branches shall approach FIID for limit allocation against the LC issuing bank on
case to case basis. Following FIID’s approval/ limit allocation, customer
exposure may be transferred to ‘Banker Acceptance.
Export Bills drawn against Irrevocable L/Cs issued by the foreign bank are
purchased from exporters in Pakistan. Branches should ensure that all necessary
precautions suggested in the Bank’s Trade Services Manual are undertaken and
due care is exercised before advising L/Cs to the customer and
purchasing/negotiating documents.
Branches/TSC should purchase only those documents which fully conform to the
terms of L/C. After purchase, documents are forwarded to the L/C opening bank
for obtaining reimbursement. Branches receive reimbursement / payment through
the Bank’s foreign correspondents maintaining MCB’s Nostro Account in various
currencies.
Reimbursement instructions in L/Cs should be carefully read before Letters of

Credit/negotiating documents.
Discrepant Documents
Documents containing discrepancies shall be allowed for negotiation. For such

negotiation, a separate discrepant line within the overall FBP/FAFB line must be
approved by the relevant approval authority. After approval of relevant approval
authority or under the approved arrangement, as the case may be, the transaction
shall be done against buy–back agreement (IB-9).
Various discrepancies and their possible solutions are explained in the Trade
Services Manual.
Approval for Negotiating Discrepant Documents
Buy-Back Agreement
Buy Back Agreement (IB-9) from the borrower / exporter should necessarily be
obtained in all cases unless mentioned or other - wise in Approval of Finance.
469
Buy Back Agreement will be entered into between the Bank and the exporter
whereby the Bank agrees to buy the bill from the exporter and sends the
documents to the foreign bank for its payment under L/C, with the undertaking of
the exporter that in the event of the bill being returned unpaid, the exporter will
buy it back at the selling price of the Bank. For the purpose of this agreement, the
selling price shall contain Purchase Price only.
Purchase Price is a pre-determined price necessary to recover outstanding finance

and Mark–up from the Exporter through persuasion and/ or recovery proceedings
in case of defaults) plus difference in exchange and Mark–up thereon.
Mark–up
Mark up shall be charged/ recovered as per CRMD circulars/ Bank’s schedule of

charges as issued/ amended from time to time.
FBP against deferred payment LC
International Chamber of Commerce (ICC), by virtue of the Article 2, Article 7(c)

and Article 12(b) of latest UCP revision (ICC Publication No. 600), has permitted
prepayment against “Acceptance / Deferred Payment” type of LCs. So export
finance / bill purchase facility may be allowed against “Deferred Payment /
Acceptance” type LCs which shall now be considered at parity with remaining LC
types provided following guidelines are meticulously followed.
1. The document forwarding covering schedule of MCB, for all export documents
drawn against Deferred Payment/Acceptance type LCs will explicitly mention
the following clause:-
documents) against your LC number _______________.”
2. Clean Export Documents
In case clean documents are presented by the exporter for prepayment/purchase

under “Deferred Payment” type unrestricted LC, MCB will incur “Deferred Payment
Undertaking” and may prepay (as per usual procedure for creating FBP / FCBD
etc.) under approved customer limit. The document forwarding schedule of MCB
shall explicitly mention the following clause:
documents) against your LC number _______________ and the beneficiary has
been prepaid “
3. Discrepant Export Documents
In case discrepant documents are presented by the exporter to MCB under

“Deferred Payment” type LC, any one of the following may be adopted:
470
a. Exporter may be prepaid by booking the exposure under

customer’s approved discrepant documents line, if available.
b. Dispatch the documents to the LC issuing bank and upon receipt

of authenticated acceptance of the discrepancies / “Deferred Payment
Undertaking (due date confirmation )” from the issuing bank, exporter
may be prepaid after giving an explicit notice to the issuing bank
(through authenticated SWIFT) regarding incurring “Deferred Payment
Undertaking” and prepayment to the beneficiary against “Deferred
Payment” LC.
4. Banker Acceptances
In either of above cases (2 or 3) exposure may be moved to bank risk under

“Banker Acceptance” upon receipt of deferred payment undertaking of the issuing
bank containing a definite maturity date subject to the condition that all
instructions in the Credit Handbook (as amended from time to time ) are
meticulously complied. i.e.
a. Receipt of authenticated acceptance/deferred payment undertaking

from LC issuing bank (rating of the bank as per above mentioned
table).
b. Approval and limit allocation from FIID (Financial Institutions &

International Division) shall be obtained on case to case basis.
Primary Security
Secondary Security

borrowing company.
471
6.2.1.10 Finance Against Packing Credit (FAPC)
Concept
Finance Against Packing Credit (FAPC) is Pre-shipment or Pre-export Finance,

extended to the exporters against valid export letter of credit / firm order. It is also
applicable to items not eligible under the concessionary Export Refinance Scheme
of the Government.
The finance is extended to exporters to meet the expenses listed below:

• Freight Charges.
• Clearing Forwarding Charges.
• Export Duty, etc.
• Handling Charges.
• Purchase of Goods.
• Packing Requirement.
The facility under packing finance is secured by creating a lien on the irrevocable
letter of Credit / firm order and stocks required for the export thereof. It also
entails the signing up of a buy-back agreement between the exporter and the Bank.
Additional collateral are also obtained from the borrower to safeguard Bank’s
interest.
The concept of purchase and sale, applied to FAPC, is as follows:
• Finance is provided to the exporter for the purchase of goods to be exported. In

other words, the goods or product are to be purchased by the Bank on behalf of
the exporter who then repurchases them from the Bank at Marked-up price.
The marked-up price comprises cost of goods / documents and mark-up is
added to the total cost of goods at a mutually agreed price between the exporter
and the Bank. The exporter will pay amount of the Mark-up plus cost of goods
/documents upon negotiation of export documents drawn under L/C or upon
receipt of export proceeds.
• In the event of non-payment of overdue Export Bill, the exporter undertakes to

re-purchase the documents of title to goods or export bill from the Bank at
marked-up price agreed in the buy-back agreement.
Eligibility
FAPC is allowed to the exporters who are in possession of an Irrevocable Letter of

Credit, or a firm order for export and to whom a regular limit of Finance against
Packing Credit is granted, or prior approval of competent authority is obtained, on
a case-to-case basis.
472
Period of Financing
Finance against Packing Credit is to be granted up to the period the shipment of

goods as per contract/LC and the pre-shipment finance shall be adjusted from the
post shipment finance.
In case customer client chooses to send the respective export documents on

collection basis without conversion of pre-shipment into post-shipment finance, in
that scenario the pre-shipment finance can remain outstand for a maximum period
of 180 days from the date of shipment, however, in case the tenure of L/C /
Contract is less than 180 days or is on sight basis, adjustment must be ensured
accordingly from the repatriation of export proceeds of the respective export bill.
Special Precautions
The L/C / Contracts shall be checked to the following effects:
• Whether goods are permissible for export or not.
• Any clause or condition mentioned in the export order / L/C, is difficult to fulfill
due to:
o Export Trade Regulations.
o Foreign Exchange Regulations.
• A check to be kept on the price of exported goods in the International Market.
• Tenure of the bill and that of the L/C is to be taken into account.
• Documents of title of goods to be received directly from the clearing agents as

per instructions contained in the Foreign Exchange Manual.
• FAPC must be adjusted from Export Proceeds in case client opts for sending the
bill merely on collection basis without conversion of pre-shipment into post-
shipment finance.
• In case client fails to make the shipment as per shipment date incorporated in
the L/C or Contract, the outstanding will be considered as past due / overdue
and notice is required to be sent for immediate adjustment from client’s own
sources or submission of an export documents, proceeds of which could be
realized to settle the finance later on.
• In case client uses FAPC line as an evergreen facility i.e. without providing
performance against the same on an ongoing basis matter must be brought into
the notice of Business Group Head & following remedies can be taken.
o Discipline the client.

o Revisit the facility structure.
Moreover, all such instances must be reported in credit proposal during next
review to update customer behavior to competent credit sanctioning authority.
473
• A certain percentage is to be kept as “Margin” as per the approval terms.
Primary Security
• Lien on export contracts / L/C

• Pledge of stocks
Secondary Security
borrowing company.
474
6.2.2 Funded Facilities - Foreign Currency
6.2.2.1 Foreign Currency Import Financing (FCIF)
Concept
The Bank will provide financing in foreign currency, normally US Dollars, against
import purchases. The product will be offered to our prime customers, who are
already availing credit facilities with a good track record and have sufficient
earnings stream. The Bank will finance the funding from Funds of F.E. 25
deposits and as such is subject to availability of funds of such deposits.
Special Precautions
• The Bank should ensure that it complies with the various requirements of the
State Bank of Pakistan.
• The existing limits (i.e. CF, RF, FIM, FATR etc.) should be blocked to allow US
Dollar based limits.
• The limits should be regularly monitored by the branch and controlling offices
of the relevant Business Group to ensure that the exposure does not exceed the
aggregate limits of the Borrower, due to depreciation of Rupee against US
Dollars.
• The lending shall be in US Dollars. However, in special cases where L/Cs are
expressed in other currencies, loan can be granted in US Dollars with
permission from Treasury.
Eligibility
• Customer to meet all other lending criteria of State Bank of Pakistan and MCB.
• T&FX, shall allocate aggregate limit to each Business Group for FCY financing
and the FCY exposure of all customers at a business group must not exceed the
aforesaid limit. Accordingly Sanction Advice sent to customer must mention
that the facility shall be available subject to the availability of FCY funds.
• The customer will be allocated a limit denominated in US$ by blocking their

existing limit(s) of Cash Finance/Running Finance/FIM facilities etc. etc.
Approval authority shall be governed by existing Credit Approval/ Review
Authority in Pak Rupees, converted in Pak Rupees at T.T. Buying rate and
Mark-up Rate as per special authorization to be applicable as per Treasury
quoted LIBOR / term rate.
• The customer would establish L/C as per sanctioned limit.
475
• At the time of payment of L/C; the branch after getting acceptance from
customer will request to Treasury for FCIF (on payment of import bills) from FE-
25 Deposits in US Dollar on account of the Branch for a period of 30 to 180
days, depending on customers request giving following details:
o Name of Customer
o L/C No.
o Amount of Limit
o LIBOR (advised by Treasury on phone)
o Maturity Date
• a) Branches shall make payment to beneficiary according to instruction of

beneficiary's bank at C&F value of imports and book FCIF loan in the name of
the customer for same amount.
b) The FE-25 funds shall be provided by Treasury to Branch account at LIBOR

through Annexure ‘B’ (in use by branches for reporting F.E. transactions)
originated at branch under code # 42 (already in use for reporting out-ward
remittances).
• On maturity, the customer would pay the loan and mark-up or any other
incidental charges by procuring required foreign currency amount from inter-
bank through MCB. Branches shall report the transaction against code 41 on
Annexure ‘A’ (in use by branches for reporting F.E. transactions) to Treasury.
• Pre-Payment of the Loan:

Prepayment of FCIF by client is permissible. No prepayment penalty shall be
charged to the customer on such payment before maturity.
Primary Security
• TR favoring MCB
Secondary Security

borrowing company.
476
Tenor
The tenor of the facility will be determined on a case-to-case basis but will not
exceed 180 days. No rollover shall be permissible, beyond 180 days from the date
of initiation of the finance.
Accordingly, customer to execute additional documentation to the effect that where

customer fails to adjust the finance by maturity, bank may finance repayment of
the liability in FCY through Forced Rupee finance.
Mark-up
The mark-up terms will be LIBOR plus Bank’s spread. The rate will be set on the
date of disbursement based on the prevailing LIBOR for that tenor on that date.
Treasury’s share shall be restricted to LIBOR while the spread will represent the
income of the branch. Spread over LIBOR would be recommended on a case to case
basis.
Mark-up on US$ FCIF would be recovered as per agreed cycle with the customer,
i.e. on quarterly basis or on maturity. The branch would accrue this mark-up on
monthly basis as per existing procedure. In case of Forced rupee Finance to adjust
the FCY loans, mark-up to be recovered @ SMR.
Delivery of Pledged Stock
In case of finances secured by pledge of goods, the customer may require partial
delivery of pledged stock. In this case, the customer would be required to deposit
an amount inclusive of 5-10% margin on the drawing power value of the stock
being released or as per Approval Advice. These funds may be kept in cost bearing
deposits (PLS 365 Days, TDRs) and no-cost bearing deposits (Margin Account) and
may be released after complete adjustment of the loan.
Exchange Rate Risk
Since, there would be no forward cover booking to hedge the exchange rate
fluctuations in the said transaction, therefore, exchange rate risk will be borne by
the customer. To mitigate this risk, an undertaking / indemnity from the customer
would be obtained that they will provide Pak Rupees to purchase US Dollar
equivalent of Principal plus Mark-up or any other charges at prevailing market
rate. Revaluation on monthly basis for both principal and mark-up recoverable
amount will be done at branch level.
Documentation
Following documents will be obtained from the customer:
• Promissory Note in US Dollars, Letter of Continuity and Letter of Lien & Set-off.
• Agreement for financing on mark-up basis in US Dollar (incorporating authority

from customer, in favor of bank, to raise the US Dollar from any source it
deems fit (including inter-bank market) to adjust the loan with mark-up and
477
also the fact that the customer would be liable to reimburse the bank from its
own sources, the rupee equivalent of the US Dollar purchased to settle the loan
plus mark-up plus all incidental charges as well).
• Letter of Hypothecation / Letter of Pledge / Trust Receipt – amounts to be

mentioned in US Dollar.
• All security documents required for the credit line being blocked to allow FCIF
exposure must be in place.
478
6.2.2.2 Foreign Currency Bill Discounting (FCBD)
Concept
The Bank will provide financing in foreign currency, normally US Dollars. The
product will normally be offered to our prime export oriented customers, who are
already availing credit facilities with a good track record. The Bank will finance the
funding from Funds of F.E. 25 deposits and as such is subject to availability of
funds of such deposits.
Special Precautions
State Bank of Pakistan.
• The existing limits should be blocked to allow US $ based Export Bill Purchase
/ Discount limit.
Dollars.
• The lending shall be in US Dollars. However in special cases where L/Cs are

following:

Aggregate amount of
person
than 1 year)
1 year)
479

Eligibility
• A minimum export business of Pak Rs.250.000M or three times of the proposed

FCBD amount, whichever is higher to be routed through MCB. However, the
same may be relaxed by Business Group Head.
• The facility will be available against Export L/Cs for commodities / countries
not on negative list and shall also not be available in case financing has been
availed against SBP Export Refinance Scheme under the same L/C.
T&FX shall allocate aggregate limit to each Business Group for FCY financing and
the FCY exposure of all customers at a business group must not exceed the
aforesaid limit. Accordingly Sanction Advice sent to customer must mention that
the facility shall be available subject to the availability of FCY fund at the time of
availment.
The customer will be allocated a limit denominated in US$ by blocking his existing
Post-shipment limit(s). The security structure will be the same as that of the
blocked facility or as per approval. Approving authority shall be governed by
existing Credit Approval Powers in Pak Rupees vis-à-vis FCBD US Dollar Limit,
converted in Pak Rupees at T.T. Buying rate and Mark-up Rate special
authorization as applicable to finance against Treasury quoted fixed term rate.
Similar procedure for Discounting of export bill in US Dollar as is presently being

done where we book FBP in Pak Rupees at our branches with some modifications,
as detailed below should be followed:
Primary Security
480
Secondary Security

Mark-up
date of disbursement based on the prevailing LIBOR for that tenor on that date.
Treasury share shall be restricted to LIBOR. While the spread will represent the
income of the branch. Spread over LIBOR would be recommended on a case to case
basis.
Mark-up on US$ bill amount to be recovered upfront for up to the tenor of bill and
recorded as Liability under “Mark-up Recovered in Advance”.
Tenor
The tenor of the facility will be determined on the basis of tenor of the bill.
However, it should not exceed 180 days from the date of shipment or as allowed by
the SBP from time to time whichever is lower.
Documentation
• Request for Finance against valid export L/C.
• Relevant Export Documents / Bill of Exchange, Letter of Continuity and Letter

of Lien & Letter of Set-off.
• Agreement for financing on mark-up basis (incorporating authority from

customer, in favor of bank, to raise the US Dollar from any source it deems fit
to adjust the loan with mark-up in case of non-realization of export proceeds
and also the fact that the customer would be liable to reimburse the bank from
its own sources, the rupee equivalent of the US Dollar purchased to settle the
loan plus mark-up at agreed rate (LIBOR + spread) plus all incidental charges
as well).
• Letter of Lien on Export bills and all other security documents for the credit line
being blocked to allow FCBD must be in place.
• Accepted offer letter of Facility (One time) incorporating acceptance from

Customer that US $ proceeds of the Finance to be immediately surrendered to
Bank against Pak Rupees at T.T. Buying rate.
481
6.2.2.3 Foreign Currency Export Financing (FCEF)
Concept
The Bank will provide financing in foreign currency, normally US Dollars, against
Pre-Shipment Finance and Post-Shipment Finance. The product will be offered to
our prime export oriented customers, who are already availing credit facilities with
a good track record. The Bank will finance the funding from Funds of F.E. 25
deposits and as such is subject to availability of funds of such deposits.
Pre-shipment Finance – This will be allowed by blocking the existing Cash Finance
/ Running Finance / FAPC / ERF Pre 1 and 2 limits against export contracts or
L/C.
Post-shipment Finance – This will be allowed by blocking the existing ERF Post
Shipment /FAFB/ FBP limits.
Special Precautions
State Bank of Pakistan (SBP).
• The existing limits should be blocked to allow US $ based limits.
Dollars.
• The lending shall be in US Dollars. However in special cases where L/C is

• Please note that the product shall be offered to customers on very selective
basis, keeping in view the yield of account and competitive considerations. Prior
approval of Group Heads to be obtained in each case.

following:

482
Aggregate amount of
person
than 1 year)
1 year)

Eligibility
• Customer must have an Export Letter of Credit or Firm Export Order to qualify
for FCEF.
• Minimum export of PKR 250.000M is affected through all banks / as per latest
SBP approved form “EE”.
• The facility will be available against Export L/Cs / Firm Contract for
commodities / countries not on negative list and shall also not be available in
case financing has been availed against SBP Export Refinance Scheme under
the same L/C / Firm Contract.
• T&FX, shall allocate aggregate limit to each Business Group for FCY financing
and the FCY exposure of all customers at a business group must not exceed the
aforesaid limit. Accordingly Sanction Advice sent to customer must mention
that the facility shall be available subject to the availability of FCY fund at the
time of availment.
• The customer will be allocated a limit denominated in US$ by blocking his

existing limit(s) of Cash Finance/Running Finance/Export Refinance Pre-
Shipment facilities, etc., etc. The security structure will be the same as that of
483
the blocked facility i.e. hypothecation or pledge and/or collateral. Approval

authority shall be governed by existing Business Discretionary Powers in Pak
Rupees vis-à-vis FCEF US Dollar Limit, converted in Pak Rupees at T.T. Buying
rate and Mark-up Rate special authorization as applicable to finance against
Treasury quoted fixed term rate.
• On receipt of limit approval and completion of Documentation, the branch will

send a request to Treasury for placement/borrowing of US$ for onward lending
to the customer.
• Once approval from Treasury is received specifying the cost: i.e. LIBOR rate
and maturity, a ready sale request will be put up to the Treasury.
• The customer would simultaneously sell the proceeds of the loan to Treasury at
the agreed spot-buying rate on the same day. The proceeds in Pak Rupees
would then be credited to the customer's Rupee account maintained at the
branch. Please note that FE-25 circular also has this precondition that the US$
proceeds of the loan should be surrendered to the bank for conversion into Pak
Rupees at prevailing rates.
• Repayment within Maturity:
o Each tranche disbursed under the loan along with Mark-up, would be
adjusted from Export proceeds in US Dollar as per tenor on maturity as per
arrangement/agreement.
o The loan can be extended for further 30 days provided the total period does
not exceed 180 days (for extension beyond the 180 days period, SBP
approval is requited). However, loan will be re-priced at the prevailing
market rate on the date of extension.
o Prepayment of FCEF by client is permissible. No prepayment penalty shall

be charged to the customer on such payment before maturity
• Delayed Payment:
o In case of inability of the customer to make the shipment or non-realization

of export proceeds on due date, the customer would be required to
immediately arrange and pay the loan and mark-up in US Dollar from own
sources. It may be noted, that however, in case of non-realization the
customer is allowed, with prior approval of the SBP, to purchase US dollar
from the Inter-bank at the prevailing rate on the date of maturity and settle
the bill. Similarly in case of delayed payment the customer is also allowed,
with prior permission of the SBP, extension in maturity but this will be done
at prevailing interest / mark-up rate applicable on the maturity.
o In case of delayed payment, any loss will be borne by the customer. Apart
from that, SMR shall apply from the date of maturity to final adjustment.
484
Security
• For pre-shipment finance, please refer to possible security structure available at

FAPC (6.2.1.10).
• For post-shipment finance, please refer to possible security structure available

at FAFB (6.2.1.8).
• Any shortfall in security value (on the basis of revaluation to be undertaken at

least monthly) to be topped up. This will be the responsibility of Branch and
controlling offices of respective Business Group.
• Normally, financing should be restricted up to 85% to 90% of the Contract / LC

/ Bill amount.
Mark-up
date of disbursement, based on the prevailing LIBOR for that tenor on that date. It
has been agreed with Treasury that their share will be restricted to LIBOR while
the spread will represent the income of the branch. Spread over LIBOR would be
recommended on a case-to- case basis.
Mark-up on US$ FCEF would be recovered as per agreed cycle with the customer,
i.e. on quarterly basis or on maturity. The branch would accrue this mark-up on
monthly basis as per existing procedure.
Tenor
The tenor of the facility will be determined on a case-to-case basis but will not
exceed 180 days.
Delivery of Pledged Stock
In case of finances secured by pledge of goods, the customer may require partial
delivery of pledged stock. In this case, the customer would be required to deposit
an amount inclusive of 5-10% margin on the drawing power value of the stock
being released or as per Approval Advice. . These funds may be kept in cost bearing
deposits (PLS 365 Days, TDRs) and no-cost bearing deposits (Margin Account) and
may be released after complete adjustment of the loan from export proceeds. Where
export proceeds are not received or less proceed is received, on maturity the
aforesaid fund / deposit held with Bank may be utilized for purchase of US Dollar
from any source for adjustment of the loan.
Exchange Rate Risk
The exchange rate risk is being borne by the customer. Bank’s risk in this respect
would be limited to the mark-up amount, the gain / loss against which shall be
accounted for at branch level.
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Documentation
• Request for Loan against valid export L/C or Firm Contract.
• Promissory Note in US Dollars, Letter of Continuity and Letter of Lien & Set-off.
• Agreement for financing on mark-up basis (incorporating authority from

customer, in favor of bank, to raise the US Dollar from any source it deems fit
to adjust the loan with mark-up in case of non-realization of export proceeds
and also the fact that the customer would be liable to reimburse the bank from
its own sources, the rupee equivalent of the US Dollar purchased to settle the
loan plus mark-up plus all incidental charges as well).
• Letter of Hypothecation / Letter of Pledge – amounts to be mentioned in US

Dollar.
• Accepted offer letter of Facility (One time) incorporating acceptance from

Customer that US $ proceeds of the Finance to be immediately surrendered to
Bank against Pak Rupees at T.T. Buying rate and undertaking from Customer
to adjust the excess amount if due to adverse fluctuation in exchange rate, the
total exposure exceeds the aggregate limit sanctioned in favor of the party.
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6.2.3 Funded Facilities - State Bank of Pakistan Schemes
6.2.3.1 SBP Export Re-Finance Scheme
Concept
Under the Export Refinance Scheme, refinance facility is available to banks from
State Bank of Pakistan at a concessionary rate of Mark-up. The low mark-up rate
is part of the Government's policy to offer various incentives to boost the country's
exports. For the details of the scheme, refer to State Bank of Pakistan’s BSD
Circular No. 35, dated 28 September 2001. Circulated vide PO/FEX/T&FX/166
dated 4th October, 2001 and amendments from time to time.
Incentives
• Under the Prudential Regulations, exporters are exempt from certain

restrictions, available to both direct and indirect exporters. These are as under:
o Both pre/ post shipment credit provided to finance export of goods covered
by letter of credits / firm contracts are not included in the definition of
accommodation, as per Prudential Regulation I.
o Facilities provided to finance for export of commodities eligible under Export

Finance Scheme are exempt from the per party limit on clean facilities,
(Prudential Regulation-4).
o Linkage between total accommodation availed by any borrower from banks /

financial institution, that it does not exceed 10 times of the value of Capital
and Reserves (free of losses) as disclosed in borrower’s Audited Financial
Statements do not apply to Export finance as the same do not come within
meaning of accommodation as per P.R.–I, (Prudential Regulation-5).
o The banks are free to determine the rates of charges in respect of various
services they may provide to their constituents except in the case of rates of
charges relating to export refinance which is notified by SBP.
• In order to promote export and to ensure that small, medium, emerging direct
and indirect exporters have an access to the credit facilities, cover obtained by
the exporters from the Pakistan Export Finance Guarantee Agency Limited
(PEFG) agency will substitute the collateral requirements of banks and hedge
the financial risks of commercial banks against manufacturing, non-
performance, non-delivery risk and non-payment.
Export Finance Scheme – General
• This scheme provides finance, at the stage of pre or post-shipment, of eligible

items under two parts i.e., Part I and II.
• The facility under this scheme will continue to be available to small and
medium sized enterprises having exports up to US $ 2.5 million equivalent
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during the preceding fiscal (July 01 to June 30) year. Emerging direct exporters
who have not previously exported products, indirect exporters who manufacture
or supply goods or material which can be used for exports and direct exporters
including commercial exporters and trading companies, shall be eligible for
financing facilities under the scheme as hitherto fore. An exporter can avail the
facility under both the parts of the scheme provided the facility availed in one
part is not in duplication of the facility availed under the other part of the
scheme.
• The period of finance extends to a maximum of 180 days in case of direct

exports and 120 days in case of indirect exporters. However, where facilities
against a particular firm order/ export letter of credit are availed both by direct
and indirect exporter, the combined period shall not exceed 180 days or as per
the validity of the L/C, whichever is earlier.
Export Finance Part – I
• Under Part-I, finance is provided on the basis of a Firm Order/Contract or L/C

or upon presenting requisite documentary evidence confirming shipment under
export LC or a firm sales contract on a case-to-case basis. The facility can be
extended in both pre-shipment and post shipment scenarios.
• For direct exporters, the finance from banks will be to the extent of 100% of the
value of firm export order / contract/letters of credit, both at pre and post
shipment stages.
• Indirect exporters who supply inputs i.e. materials and goods to a direct
exporter to be used for further processing and /or to be exported, will also be
eligible to avail finance from banks under the scheme at pre–shipment stage.
The direct exporter, who has a firm export order / contract / letter of credit may
request his bank to open an inland letter of credit (ILC) / or the direct exporter
may issue Standardized Purchase Order as per (SBP Annexure-E) in favor of the
Indirect Exporter i.e. domestic supplier. Indirect exporter will be eligible to avail
finance from banks against such Inland Letter of Credit (ILC) or Standardized
Purchase Order (SPO), to the extent of the amount mentioned therein.
• Commercial bank, after providing finance to the Direct / Indirect Exporters

shall become eligible to avail refinance from the State Bank of Pakistan.
• The total amount of financing extended by any bank against any one firm
export order or letter of credit to both Direct and Indirect exporters shall not
exceed the total amount of the firm export order / contract or letter of credit.
The combined period of financing against an export order to the Direct Exporter
as also to his suppliers i.e. Indirect Exporter shall also not exceed the
permissible period of 180 days from the date of first draw-down /
disbursement. The period of financing by bank under the Scheme to an indirect
exporter shall be determined as per the terms of the relevant Inland Letter of
Credit / Standardized Purchase Order, but subject to a maximum of 120 days.
The bank shall, however, ensure that the total amount withdrawn by the Direct
Exporter and value of ILC/ SPO established on his behalf does not exceed the
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value of the export finance admissible to the Direct Exporter against the
particular Export Order/Contract/Letter of Credit.
Security
• For pre-shipment finance, please refer to possible security structure available at

FAPC (6.2.1.10).
• For post-shipment finance, please refer to possible security structure available
at FAFB (6.2.1.8).
Export Finance Part – II
• Under Part-II, however, the Firm/Order/Contract or L/C is not required, since

finance is to be provided to the exporter on the basis of his last fiscal year's
export earnings.
• An exporter is entitled to obtain finance up to a prescribed extent of the

previous fiscal year's export performance, on a revolving basis, subject to
fulfillment that a given percentage of the amount so obtained is exported during
the financial year. (Presently 2 times of last fiscal year’s exports. For latest
requirements of entitlements refer to latest SBP circulars on the subjects as
notified by our Foreign Trade Division from time to time.
Submission of Documents (Part – I)
• The Direct exporter shall be liable to submit the proof of shipments to the bank
concerned against the loan, evidencing shipment made against the relevant
Firm Export Order/Export Letter of Credit within 30 days from the date of
shipment { last shipment in the case of fragmented shipment(s)} of from the
date of expiry of loan, whichever is earlier.
• The loan granted to the Indirect Exporter, along with markup thereon, shall be
adjusted upon delivery of the inputs and payment of documents drawn under
the ILC/SPO or at the expiry of the period of 120 days, whichever is earlier. The
Indirect exporter shall be under obligation to produce documents, evidencing
utilization of the loan to the banker of the Direct Exporter within 15 working
days of the supply of goods to the direct exporter.
In case shipping documents are not received by bank on or before 30 days from the
date of the expiry of loan, the bank shall recover fine from the concerned exporter
treating the case as that of non-shipment and pass on the fine so recovered to the
concerned office of State Bank within three working days. The exporter concerned
shall be entitled to refund of fine so recovered, on submission of the relevant
document and after adjusting the fine that may be applicable for delayed /short
shipment and delayed submission of shipping document.
• While the export of the commodity, against a Firm Export Order / Export Letter
of Credit, shall remain the responsibility of the direct exporter, the indirect
exporter would be under obligation to supply the required inputs in accordance
with the terms of the ILC/SPO, failing which he shall be liable for fines under
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the Scheme. Payment of such fines shall, however, not absolve him for his
liabilities to the Direct Exporter.
• On deliveries of the domestic inputs and receipt of payment by the supplier i.e.
indirect exporter, the amount(s) of the finance earlier granted in his favor shall
be adjusted. Likewise as the Direct Exporter would have received inputs from
his designated Indirect Exporter, as per terms of ILC / SPO the amount
disbursed by his bank, to the bank of Indirect Exporter, shall become a loan
liability of the Direct Exporter as per normal lending practice.
• It shall be obligatory on the part of the Direct Exporter that all the ILCs
established or SPO issued in favor of IDEs are in relation to the supply of
inputs for export and would contain the name of the exporter and Number of
firm export order / contract/ letter of credit. The financing bank of the Indirect
Exporter shall be under obligation to certify that the facility availed by the
Indirect Exporter was covered by an export order / contract or letter of credit of
the Direct Exporter.
Substitution
• In case the Direct Exporter fails to make shipment under the relevant Firm
Export Order / Export Letter of Credit on the basis of which finance / refinance
has been availed by him, he shall be under obligation to produce shipping
documents evidencing shipment of the export of same or any other eligible
commodity valuing the amount of loan, in respect of another Firm Export Order
/ Export Letter of Credit. The Direct Exporter will, however, undertake and
confirm separately that he has neither availed of finance under EFS against any
such new contract / letter of credit nor has reported or would report any entry
of relevant “E” Forms already utilized by him under Part II of the EFS. The Bank
concerned is authorized to accept such substitution offered by the Direct
Exporter. A request in this regard shall be submitted by DE to his bank along
with submission of shipping documents.
• The Direct Exporter shall be eligible to obtain finance against a Contract or L/C
partially and substitute any other export under the same contract or L/C
showing it under another loan of Part I or to use it for reporting performance
under Part II provided no E-Form is used simultaneously under both parts of
EFS so as to avoid duplicate financing under the Scheme.
• No facility of substitution is available to the Indirect Exporter in respect of

supply of inputs to the Direct Exporters.
Rate of Mark-up
• Banks being able to obtain finance from SBP at a concessional rate are in a
position to charge a corresponding low rate of mark-up.
• The maximum rates of Mark-up for limit period shall be as notified by SBP from
time to time.
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System of Fine
In the event of non-shipment by the exporters availing of finance, they shall be

subjected to fines in addition to the Mark-up. The scale of fines is explained in the
relevant circulars of SBP.
Refund of Fines and Penalties
• The exporter may lodge request for refund of fine if recovered for non-shipment
to the bank concerned along with shipping documents. Such request shall be
processed by the bank within 7 days of receipt of the request; the bank shall
record a certificate of correctness of the refund claim and would approach the
concerned Office of SBP for refund of fine as per instructions. The SBP office
concerned will examine the case and allow refund of fine within a maximum
period of 5 working days of its receipt.
• In cases of failure to export or delay in export for the reasons beyond the
control of the borrower, State Bank may, at its absolute discretion, waive /
refund the entire fine or part thereof. Such representations are required to be
made by the borrower concerned with full facts / supporting cogent reasons to
the SBP Office concerned which will be considered in the Central Directorate
and relief granted if found justified.
Shortfall in Export Performance
In case an exporter, who had obtained finance under Part-II of the Scheme, fails to
match the same by his export performance, he will be subjected to the prescribed
fine. This shortfall is to be calculated as per present procedure.
On Expiry of Export Re-Finance
• In case where an exporter has defaulted in his obligations to export goods

by/on the due date, i.e. to a maximum period of 180 days of the finance
provided, the exporter's account shall have to be debited by the following
amounts:
o Amount of export refinance.
o Fine to be imposed on behalf of the State Bank of Pakistan.
o The amount of Mark-up, at the prevailing rate (up to 180 days as per SBP
and thereafter on repayment by Bank to SBP at Forced DF rate or as per
arrangement), for actual number of days, the finance was outstanding.
• Amounts mentioned in the foregoing sub-paragraphs (a) and (b) shall be

deposited with State Bank of Pakistan immediately.
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Further Reference
• Amendments by State Bank of Pakistan in their various instructions regarding

the Export Finance Scheme, is an on-going process. As such, the rates,
percentages and other details of mark-up, margin, penalties, etc., indicated in
the foregoing guidelines/ examples are only of academic value and used mainly
for illustrative purpose.
• TSC shall issue necessary operational guidelines in this regard and shall also
maintain proper MIS on a bank wide basis. Such MIS shall be shared with all
stake holders, as and when required.
• Thus, in every such instance, actual reference should always be made to the
latest SBP/ TSC Circulars on the subject, as advised to Branches from time to
time, by our Principal Office.
• The portions contained in this Manual on Funded/ Non Funded facilities

should be read in conjunction with the relevant chapters in our Manual of
Instructions on Foreign Exchange, as the latter covers many other important
aspects, particularly those relating to Exchange Control.
Primary Security
• Lien on approved (from SBP) EE statement

Secondary Security
borrowing company.
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6.2.3.2 SBP-LTFF
The purpose of the Scheme is to enable the banks/DFIs to provide financing

facilities to the eligible borrowers / projects for the import of plant, machinery,
equipment, generators and accessories. Under the LTFF Scheme, refinance facility
is available to banks from State Bank of Pakistan at a concessionary, rate of Mark-
up. The low mark-up rate is part of the Government's policy to offer various
incentives to boost the country's exports. For the details of the scheme, formalities,
procedures and documentation, please refer to State Bank of Pakistan’s BPD
Circular No. 14, dated 18th May 2004 and MFD circular no. 07 dated 31-12-2007
and its amendments from time to time. TSC shall issue necessary operational
guidelines in this regard and shall also maintain proper MIS on a bank wide basis.
Such MIS shall be shared with all stake holders, as and when required.
6.2.3.3 Other SBP financing Schemes
For the development of many economic sectors, SBP launches many schemes for
time to time. For the details of those schemes, formalities, procedures and
documentation, please refer to State Bank of Pakistan’s various circulars and their
amendments from time to time. TSC shall issue necessary operational guidelines in
this regard and shall also maintain proper MIS on a bank wide basis. Such MIS
shall be shared with all stake holders, as and when required.
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6.3 Non-Funded Facilities
6.3.1 Letters of Credit (Foreign/ Inland)
6.3.2 DA Bills & DDAA
6.3.3 Guarantees, Performance / Bid Bonds, etc.
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6.3.1 Letters of Credit (Foreign/ Inland)
Introduction
A Letter of Credit is a document issued by a bank on behalf of a customer,

authorizing a beneficiary to draw a draft or sometimes without requirement of a
draft(s), which will be honored on presentation by the bank if drawn in
accordance with terms and conditions specified in the letter of credit.
It is a written undertaking by a bank (issuing bank) given to the seller

(beneficiary) at the request and on the instructions of the buyer (applicant) to
pay at sight or at a determinable future date a stated sum of money against the
required documents. The documents include commercial invoice, certificate of
origin, transport document relating to the mode of transport used and other
documents required as per terms of letter of credit.
Documentary credits are, therefore, an arrangement of security for the parties

involved provided by the bank in the form of a conditional guarantee. The
conditional guarantee is related to the documents only and not to the
underlying goods, services and/or performances to which the documents may
relate.
Parties to a Letter of Credit
• The Applicant (Opener of L/C)

• Opening Bank (Issuing Bank)
• Advising Bank
• Beneficiary (Exporter)
• Confirming Bank
• Negotiating Bank
• Reimbursing Bank
Details of each of the above are available in TSC’s Procedural Manual.
Types of Documentary Credit
• Revocable Letter of Credit

• Irrevocable Letter of Credit
• Irrevocable Confirmed Letter of Credit
• Revolving Credit
• Transferable Credit
• Back to Back Credit
• Red Clause or Packing Credit
• Stand-by Credit
Details of each of the above are available in TSC’s Procedural Manual
Modes of Payment
A credit must state whether it is available by sight payment, deferred payment,

acceptance or negotiation. (UCP 600 - Article 6- b). Following are the types:
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• Available by Negotiation
• Available by Acceptance
• Available by Sight Payment
• Available by Deferred Payment
Brief details of each of the above are available in TSC’s Procedural Manual
Broad Classification
Broadly, L/Cs may be classified as under:
• Sight - Letters of Credit (L/C - Sight)

• Usance Letters of Credit (L/C - U)
In case of L/C - Sight, the underlying draft (bill of exchange) is drawn ‘at sight’
and the relevant documents are held by the Bank as security, until the same
are retired. This is payable by the LC issuing bank as soon as the documents
required under the LC are sighted (received and scrutinized) by the LC issuing
bank. For LC –Sight, payment terms can be by negotiation or sight payment.
In case of L/C - U, the underlying draft is for a tenor stipulated in the L/C,
payable by the customer on the due date.
All limit proposals (whether detailed, short form, etc.) should invariably
mention the broad classification of L/C that the branch intends to issue, and
special type of L/C should be clearly described.
Procedure for Establishment of Letter Of Credit
Please refer to TSC’s Manual for all procedural formalities related to

establishment of LC and scrutiny of LC application.
Fixation of Margin
The competent credit approval/review authority fixes margin considering

customer's credit worthiness as well as SBP margin requirements. Thus, a
higher margin than SBP’s prescribed minimum margin may be stipulated.
Credit Report of Exporter
Before establishing L/C the branch should obtain credit report of beneficiary
directly from Foreign Correspondent or through enlisted Credit Report
Preparing Agency. Presently banks are required to obtain credit report on
exporters where the amount of L/C is PKR 1,500,000 or above.
Factors Motivating Credit Decision
In arriving at a credit decision, the respective credit approval/ review authority

would need to take into account various pertinent factors, such as:
496
• Extra care should be exercised in cases where the L/C is a one-off

transaction with a customer who does not have a regular approved credit
line. In such cases, the creditworthiness of the customer must be verified by
means of credit reports from other banks/financial institutions/other
reliable sources and through market checks.
• Requirements of S.B.P. Prudential Regulations should be properly fulfilled.
• Bank's risk should be carefully assessed and adequate cash margin should
be stipulated. In case of high risk L/C transactions, 100% cash margin
should be obtained.
• Although S.B.P. margin restrictions on L/Cs vary from time to time,

appropriate margins may be prescribed by the bank keeping in view Bank’s
credit policy and the degree of risk involved in each particular L/C
transaction.
• In case of Inland LC, branch/ relationship manager should ensure that all
KYC formalities are properly fulfilled.
• Where beneficiary and applicant are related parties in case of an inland LC,
branch/ relationship manager should ensure that customer’s request is
based on a genuine business transaction.
• Upon receipt of the import documents, adequate follow up, should be

initiated and maintained with the customer, in order to ensure prompt
retirement of the bill. The Bank should protect its interest and, wherever
feasible, make adequate arrangements for clearance and safe
storage/insurance of the imported merchandise, through Bank’s approved
Clearing Agent, with prior approval of the competent authority.
• Through the various periodic statements submitted by the Branches the

respective Regional / Circle Offices are to exercise effective control over all
L/Cs opened, as well as the bills drawn there under, particularly the
outstanding items.
• In case of all long outstanding items, where due dates have passed, the
Regional Office should promptly contact the Branch Manager/Chief
Manager and follow-up for early settlement. Reasons for default / delay in
effecting payment should be thoroughly investigated and prompt remedial
measures should be adopted. All accounts that are past due should be
watchlisted.
• Outstanding PAD / DA bills not yet matured or outstanding L/C (DA /

Sight) to reduce limit by same amount.
Documentation
Intimation is sent to the importer for acceptance of usance draft. On

acceptance of usance draft, stamps of appropriate value are affixed on usance
draft. The maturity is determined and conveyed to the negotiating bank. Due
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date diary is maintained for all the accepted usance bills of exchange. Upon
maturity date, payment is received from the importer and remittance is affected
to the negotiating bank as per their instructions.
Sometime, importers do not pay off the liability on due date; but on the other
hand the opening Bank is liable to pay the bill amount at maturity. In such a
case, Forced PAD is created and bill amount is remitted to the negotiating
bank. Subsequently recovery efforts are initiated against the importer.
Primary Security
• Lien on import documents
Secondary Security

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6.3.2 DA Bills and DDAA
Concept
The facility is extended when the Bank has already handed over the documents
to the importers against their acceptance of usance bill, which means they may
already have taken custody, and / or disposed off the imported goods. Such
facility is allowed only to reputable clients and / or backed by collateral.
The Bank has in its possession only the accepted usance bill / draft for which
payment by the importers is awaited. However, it is Bank’s policy that the
goods against such accepted bill shall remain under Bank’s pledge / control
unless the customer has approved limit of Document Delivered Against
Acceptance (DDAA) which is usually backed by T/R.
Whether or not the importers make the payment, the Bank is bound to provide
reimbursement, as per terms of L/C, to the correspondent negotiating bank on
the date of maturity already conveyed to them.
The DA Bills may be retired on maturity through any of the following means:
• Through debit to the customer’s account, if there is adequate credit balance

/ limit available.
• Through initiating a forced PAD / DF in case customer fails to make the

payment at maturity.
Special Precautions
It must be ensured that:
• The importer has duly accepted the Draft / Bill of Exchange duly stamped
upon presentation.
• Branch has diarized and communicated the date of acceptance and

maturity to the correspondent negotiating bank.
• The importer should be reminded at least 10 days before maturity date to

arrange payment of his accepted bill within the maturity period.
Marked-up Price
Marked-up price is to be calculated by applying SMR.
Payment of Accepted DA Bills Within Maturity
In case the importers make payment of the accepted DA Bill within the
maturity period, no mark-up is charged as bank’s finance is not involved. The
amount shall be kept in margin account and shall be adjusted towards final
payment on date of maturity.
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The Bank shall recover its usual handling charges and DA commission per
month for any period beyond the validity of the L/C and our postage/ cable
charges along with the bill amount plus correspondent bank's charges, if any,
less the amount of margin held, if any. The rates of handling charges, DA
commission, and postage / cable charges are to be recovered as per bank’s
schedule of charges/ circulars issued from time to time.
Payment of Accepted DA Bills After Maturity
There may be a situation where the importer does not make payment of the
accepted DA Bill within the period of maturity; therefore, in that case Bank will
create a Forced PAD-Usance to remit the payment to negotiating bank. The
same must be brought to the notice of the relevant General Manager for taking
further actions to recover the forced loan.
Possible Security Structure (DDAA)
Primary Security
• Accepted Bill of exchange
• TR favoring MCB
Secondary Security

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6.3.3 Guarantees, Performance / Bid Bonds, etc.
Concept
Section 126 of Contract Act 1872, defines “Contract of Guarantee”, “Surety”

“Principal Debtor” and “Creditor”.
A “contract of guarantee” is a contract to perform the promise, or discharge the

liability of a third person in case of his default.
The person who gives the guarantee is called the “surety” / “guarantor”.
The person in respect of whose default the guarantee is given is called the
“principal debtor”.
The person to whom the guarantee is given is called the “creditor”.
In other words Bank Guarantee is an irrevocable undertaking of a bank

(guarantor) to effect payment against presentation of a Written Statement of the
Guarantee-holder (beneficiary) to the effect that a given contractually agreed
obligation has not been fulfilled. The guarantee is a unilateral agreement
between the bank and the beneficiary, which is concluded on behalf of a third
party.
Special Precautions
• As per the State Bank of Pakistan Prudential Regulations, following must be

observed:
o All guarantees to be issued shall be fully secured, except in the cases

mentioned at Appendix I to Chapter 6.3 where it may be waived up to
50%, provided that least 20% of the guaranteed amount shall be
obtained as margin in the form of liquid assets as security.
o The requirement of security can also be waived in cases of guarantees

issued to Pakistani firms and companies functioning in Pakistan
against the back to back / counter guarantees of branches of
guarantee issuing bank rated at least ‘A’ or equivalent by a credit
rating agency on the approved panel of State Bank of Pakistan or
Standard & Poor, Moody’s and Fitch-Ibca etc.
Besides, in case the counter-guarantee issuing bank is situated in a

foreign country, the rating of at least 'A' or equivalent by a local credit
rating agency of the respective country shall also be acceptable,
provided that guarantee issuing bank in Pakistan is comfortable with
and accepts the counter guarantee of such foreign bank. However, the
prescribed rating requirement for banks situated in foreign countries
may be relaxed for transaction amount up to US$250,000, subject to
internal credit controls and approvals of the bank. For transaction
amounts greater than US$250,000, State Bank of Pakistan may be
approached for specific approvals / exemption, on case by case basis,
501
where the prescribed minimum rating requirement cannot be complied

with.
o In case of back to back letter of credit issued for export oriented goods
and services, proper security arrangements there against may be
approved subject to the condition that the original L/C has been
established by MCB or a bank rated at least A by Standard & Poor,
Moody’s or Fitch.
o The guarantees shall be for a specific amount and expiry date and
shall contain claim lodgment date. Open-ended guarantees in favor of
Government departments, corporations / autonomous bodies
owned/controlled by the Government and guarantees required by the
courts may be approved without clearance from State Bank of Pakistan
provided adequate collateral or other arrangements acceptable to the
bank shall be obtained.
• While executing a guarantee, the terms/conditions of the guarantee should

be closely examined in order to determine
o the extent of Bank's obligation and/or financial liability under the

guarantee and
o the type of guarantee, unusual conditions contained therein, if any,

and whether such terms/conditions could create unforeseen
circumstances at a later stage, leading to the guarantee being called up
for encashment. Hence a proforma of the guarantee to be issued
should, first of all, be obtained and thoroughly reviewed and it should
also be examined and approved by Bank's Legal Affairs
Division/Bank's lawyers. After the guarantee has been issued, a copy
of the same should be attached to the counter guarantee executed by
the customer.
• Approval of guarantees shall be obtained in terms of bank’s Credit

Approval/ Review document.
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ASSUMING OBLIGATIONS ON BEHALF OF NBFCs (PR Requirements)
Banks / DFIs shall not issue any guarantee or letter of comfort nor assume any
obligation whatsoever in respect of deposits, sale of investment certificates, issue of
commercial papers, or borrowings of any non-banking finance company. Banks /
DFIs may, however, underwrite TFCs, commercial papers and other debt
instruments issued by NBFCs, and issue guarantees in favor of multilateral
agencies for providing credit to NBFCs, provided the banks’ / DFIs’ such exposure
remains within the per party exposure limit as prescribed in Regulation R-1. Banks
/ DFIs may also allow exposure to any of their client against the guarantee of an
NBFC which is rated at least ‘A’ or equivalent by a credit rating agency on the
approved panel of State Bank of Pakistan. The total amount of guarantees issued
by an NBFC, and accepted by the banks, on the strength of which the exposure will
be allowed by the commercial bank / DFI, will not exceed per party limit of the
bank / DFI as mentioned in Regulation R-1. Before taking exposure against the
guarantee of NBFC, banks / DFIs shall ensure that total guarantees issued by an
NBFC in favor of banks / DFIs do not exceed 2.5 times of capital of the NBFC as
evidenced by the latest available audited financial statements of the NBFC and
such other means as the banks / DFIs may deem appropriate.
Broad Classification
Bank guarantees may be broadly classified under the following heads:
• Performance Guarantees
• Bid Bonds / Tender Deposit Guarantees
• Retention Money Guarantees
• Shipping Guarantees
• Guarantees for Advance Payments / Mobilization Guarantees
• Security Deposit Guarantees
• Guarantees for Payment of Dues / Court Guarantees
• Loan Repayment Guarantees
• Permanent Guarantees
• Guarantees Expressed in FCY
Performance Guarantees
These are generally requested by customers, guaranteeing completion of

work(s) or supplies, as per terms of contract and/or mutual agreement. In such
instances, special care should be exercised by the Branch Manager that:
• The guarantees are not for projects, which are in any way
uncertain/speculative.
• The contractor / customer is well experienced in his line of work, having

executed similar contracts satisfactorily in the past.
503
Bid Bonds / Tender Deposit Guarantees
The Bank is often requested by its customers to issue Bid Bonds in lieu of
deposit of earnest money against bids for tenders.
In case of breach of the terms of the Bid Bond, on the customer's part, the
Bank could be called upon to make payment.
Retention money Guarantees
A retention money guarantee is a non-payment guarantee and is an irrevocable

obligation of the bank to pay (the beneficiary) a monetary amount agreed in
advanced in the event that, after receiving the retention money, the supplier /
contractor (applicant) does not perform its contractual obligations during the
term of guarantee. Following requirements should be observed while reviewing
/ issuing a retention money guarantee,
• Guarantee amount and validity period must be in accordance with the

terms and conditions of the contract between the customer and the
beneficiary.
• Documents containing the conditions and requirements under which the
guarantee is required to be issued shall be obtained and extent of bank’s
obligation shall also be ascertained.
• Facility advising letter must contain the clause that, the customer
expresses its agreement that if it (i.e. the customer), in accordance with
the conditions of the guarantee, is asked for performance under the
guarantee, it will provide irrevocable performance in favor of the
guarantee’s beneficiary.
• Bank provides performance under the guarantee only in the event it
receives an invitation to perform duly submitted by the guarantee’s
beneficiary in accordance with the terms and conditions of the
guarantee.
• Such guarantees are issued to selected trustworthy customers with
adequate capacity and established track record
Shipping Guarantees
There are instances where the importers need to obtain delivery of goods
without production of the relevant Bill of Lading. In such cases, the Bank is
requested by the customers (importers) to issue a Shipping Guarantee in favor
of the concerned Shipping Company. Shipping guarantee should be issued
against 100 % cash margin or as per approved arrangement (DDAA/ FATR)
with the customer, after approval from relevant approval/ review authority,
where goods shall be cleared under supervision of Bank’s approved C&F Agent.
The request for issuance of shipping guarantee should comprise of the
following documents:
• Letter of request from the customer
• Copy of invoice
504
• Copy of non-negotiable bill of lading or transparent document
• Format of shipping guarantee to be issued
• Counter guarantee in favor of the bank duly signed by customer (where

forward exchange not booked)
• Undertaking to accept the draft in case of issuance letter of credit
• Undertaking to accept all discrepancies in the documents
• Undertaking to bear the difference in import bill amount due to upward

fluctuation of exchange rate
Guarantees for Advance Payment Mobilization
These bank guarantees cover the amount of advance payment made to the
customers (Contractors) in this connection, for satisfactory performance of the
Contract. The beneficiary of guarantee wants to ensure that funds released by
beneficiary against mobilization guarantee shall be released through Bank and
Banks should ensure that funds so released are used on the project.
Liability against Advance Payment / Mobilization Advance guarantee shall

gradually reduce upon successive billing by the customer to the beneficiary. At
any point in time; outstanding liability under this guarantee shall represent a
certain percentage of the contract value related to incomplete part of the project
/ supplies.
Liability shall be gradually reduced after receiving confirmation for the portion
of work done / supplies provided and reduction in respective liability from the
beneficiary.
Security Deposit Guarantees
These guarantees are issued in lieu of security deposit, generally to Utility

Service organizations for connection / supply of electricity, telephone, gas, etc.
to the customers.
Guarantees for Payment of Dues
Under these guarantees, there is an unconditional commitment to pay a certain

amount on definite dates. For example, to a landlord, guaranteeing payment of
rent, by the specified due date or to a court for payment to be made in case the
suit is decided in favor of the "Beneficiary."
Loan Repayment Financial Guarantees
Our customer may obtain loan from other Banks / FIs, who may require the
customer to provide guarantee from their Bankers(us) guaranteeing repayment
of loan. Request for issuance of such guarantee should be entertained in case
of very good customers & proper security. Where, loan repayment guarantee is
for long term, proper assessment & care should be exercised.
505
Permanent / Open-ended Guarantees
Guarantees where period of validity is not mentioned and which is valid for an
indefinite period or where validity is specified with an overriding clause that the
beneficiary can claim extension of the guarantee for any length of time at its
option can be termed as permanent / open-ended guarantee. Bank shall not be
prepared to entertain a proposal for such guarantee. However, may consider
preferably against cash / liquid collateral for purposes permitted by SBP on
case to case basis.
Guarantees Expressed in Foreign Currency
• Guarantees involving remittance in Foreign Currency must be backed by

valid Permits / Authorizations / State Bank of Pakistan’s Approval.
• Revaluation of guarantees expressed in foreign currencies shall be done in

terms of CRMD circulars issued from time to time.
• Guarantees should be for a fixed duration and the Bank should obtain
forward cover to keep its exposure fixed or be secured by FCY deposit.
Alternatively, rupee valued readily realizable security should provide
adequate margin to be further supported by letter from customer to make
up for the risk of exchange fluctuations as well.
Procedure
• A proforma of the guarantee required to be executed should invariably be

enclosed along with an application form. The clauses of guarantee must be
precise and clear. Text of all guarantees shall be referred to Legal Affairs
Division at Principal Office and should only be accepted / executed when
cleared by or duly amended by our Legal Department. Guarantee in lieu of
earnest money should be discouraged and in no case should be issued
unless full amount of guarantee is deposited with Bank by way of margin.
• Guarantee should be issued after approval is received from the sanctioning

office / competent authority.
• Before issuing guarantee a counter-guarantee (appropriately stamped)

should be obtained from the party. The stamped paper for the guarantee
should also be furnished by the customer.
• All the guarantees should be neatly typed and checked from the approved
Draft / Proforma. Cutting / Amendment particularly about the validity
period and amount should be avoided otherwise proper of branch should be
made on cutting/ overwriting.
• Before issuing guarantee, following formalities must be observed /

completed:
506
o Physical possession of all liquid securities in acceptable position should

be obtained so that there may not be any hitch in realizing the securities
in case of need.
o Margin / Liability vouchers must be passed and entered on same date

when guarantee is issued.
o Commission at the existing rate of tariff should be recovered and

recorded in guarantee Register.
o Terms and conditions of the respective sanction should be meticulously

complied with.
o Separate file should be maintained for each guarantee.
• All guarantees shall bear a unique serial number as per existing practice
having following components:
o Branch Code;
o Number of years since MCB’s year of incorporation, i.e. 1948; and
o Serial number staring from ‘1’ for every calendar year.
Security / Margin
• All guarantees must be 100% covered / secured by realizable tangible

security, preferably in cash or easily realizable securities. Further, coverage
/ security may be obtained where necessary. There is however, a relaxation
in the SBP requirement of 100% coverage in case of construction companies
bidding against International tenders.
• Preferably guarantee should not be issued at less than 25% cash margin,
however the same can be either relaxed or made further stringent on case to
case basis by relevant approval/ review authority.
• However 50% cash margin must be a mandatory requirement in case of

guarantees favoring Custom / Government Revenue Department.
• Remaining guarantee amount (after deducting the margin requirement)

should be covered by other acceptable tangible/easily realizable securities.
Validity
• Guarantees should usually not be valid for more than 12 months.
• For guarantees valid for more than 12 months, prior approval in terms of
Credit Approval/ Review document is necessary.
Extension / Renewal
• Guarantee once expired cannot be renewed. The renewal must be done

during the validity period of guarantee.
507
• Requests if received after expiry of the guarantee can be entertained by

issuing fresh guarantee without changing the text of the guarantee subject
to insertion of the terms and conditions on which guarantee was previously
issued.
• Renewal / extension of guarantees will remain subject to approval of the

Competent Authority. Prior approval will therefore be obtained by the
branch before guarantee is renewed.
• Expired guarantees (only under special circumstances) may be allowed for

renewals on a case to case basis after approval from Group Head RMG,
subject to following:
All the parties i.e. Instructing party/Counter Guarantor/ Guarantor/

Beneficiary agree to the extension of already expired counter
guarantee/guarantee
Expired guarantee may be extended effective from its last expiry date to
cover the transactions pertaining to the intervening period
Extension of expired counter guarantee (Issued by Foreign Bank) should
be obtained effective from the date of its last expiry
Separate indemnity should be obtained from Foreign Bank in respect of
all Counter Guarantee/Guarantees not governed under URDG 758
(Uniform Rules for Demand Guarantees – ICC Publication No. 758).
LAD opinion on text of guarantee should be obtained on a case to case
basis.
Expiry
• For all guarantees which have expired, a letter or notice should be sent in
writing to the beneficiary requesting to return the original guarantee duly
redeemed.
• In case no reply is received, 2nd notice / reminder be issued after a

reasonable time. Such notices should require acknowledgement that notice
has been received by the beneficiary.
• If even on 2nd notice / reminder, the beneficiary does not return the original
guarantee duly redeemed or give any reply to the letter / notice, the liability
of the guarantee should be reversed and the security be released.
• Copies of notice / reminder letter to the beneficiary must also be endorsed

to the customer.
• Copy of the letter / notice along with acknowledgement of the beneficiary

should be filed in the relative file.
• In case, the beneficiary wants to retain the original guarantee with them as
a matter of record, a certificate from them to the effect that the guarantee
stands redeemed and there is no claim against the subject guarantee
should be obtained. Such certificate should however be received by the
508
branch directly from the beneficiary. Further as a matter of abundant

precaution the receipt should also be acknowledged. In such case also the
liability would be reversed and security / margin released if there is no
other stuck-up liability against concerned borrower.
• If the guarantee is issued in favor of some Government Department, and the

relative guarantee could not be returned to the issuing branch due to some
reason, or when the same has been misplaced by such Government
Department, a certificate would be issued by that Department to the effect
that the terms of the guarantee have been fulfilled and the party is fully
discharged and there are no claims on the issuing Bank.. Such certificate
would be accepted by the issuing branch in lieu of original guarantee and
the liability there-against would be reversed and margin shall be refunded.
Such certificate should however be received by the branch directly from the
Government Agencies (beneficiary).
• Similarly liability of continuing guarantee shall not be reversed unless

original guarantee is received back from beneficiary &/or redemption cum-
no claim request is received from beneficiary directly.
Payment of Claims
The liability undertaken by the bank varies from case to case. It may be:
• Unconditional
• Conditional
In case of unconditional guarantee, the payment shall be made to the

beneficiary without any objection. The following procedure would be observed
before making payment:
• On receipt of claim from the beneficiary the same would be immediately

processed / scrutinized with the terms of guarantee.
• A reference to customer, if not stipulated under the terms of the guarantee

issued not be made or reaction awaited before effecting payment.
• If upon scrutiny the claim is not found in terms of the guarantee, the
beneficiary may be informed immediately of such discrepancies and the
claim rejected. This should however be done without least delay.
• If the claim is found in-order, the branch will pay the claim through Pay
Order / Demand Draft by debit to Margin Account Guarantee / Party’s
Current Account as the case may be. By virtue of payment of the claim if an
account is overdrawn, this will need no separate approval as this would be
treated as forced loan.
However the same must be brought into the notice of the relevant General
Manager.
509
• After payment of the claim, the party will be immediately asked to deposit
the amount of the claim paid by the Bank within 15 days time. In case party
fails to settle the claim by adjusting the account as stipulated above,
procedure prescribed for the recovery of overdue advance should be
followed-up vigorously. Till final settlement, further credit facilities /
accommodation of any nature to this party / group would be suspended.
• In case of conditional guarantees or when the guarantee is subject to

fulfillment / non-fulfillment of some terms and conditions by the principal,
the claim shall be judged accordingly and the principal be consulted before
making payment of the claim.
Primary Security

Secondary Security
510
6.4 Seasonal Finance
6.4.1 Working Capital Financing to Sugar Mills
6.4.2 Working Capital Financing to Rice Mills
6.4.3 Working Capital Financing to Flour Mills

and Traders
6.4.4 Working Capital Financing to Cotton

Ginners
6.4.5 Working Capital Financing to Textile Mills
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6.4.1 Working Capital Financing to Sugar Mills
Concept
The main raw material for sugar mills in Pakistan is Sugar Cane (though sugar
beet is also used to produce sugar). Sugar mills remain operative only during Sugar
Cane season necessitating seasonal financing needs.
Commercial Banks in Pakistan provide financing to sugar cane growers through

sugar mills, and to Mills for their working capital requirements and at times for
fixed investment needs. However, financing for major capital expenditures are
mostly allowed under consortium arrangement.
Working Capital financing to sugar mills are usually allowed against pledge of
refined sugar and a small portion in exceptional case may be allowed against Stores
/ Spares / Chemicals / Molasses.
Production Process
The sugar mill manufacturing process in Pakistan is based either on (i) Double
Sulphitation Double Carbonation process or (ii) Defection Remelt process. The
choice of process depends on prevailing condition but Defection Remelt process is
considered better as it eliminates use of hard coke and reduces cost of lime,
Sulphur / Filter / Cloth etc. which results in reduction of production costs. By
products of sugar industry are Bagasse, Molasses etc. from which particle board,
cattle feed, citric acid, acetic acid, furfurol and industrial alcohol are few to
mention. One of the key factors for profitable sugar production is sucrose recovery
percentage.
Major Risks
• Price Risk:
o Permission by Government to import sugar / excess production by local

sugar mills may lead to fall in prices in local market.
o Cost of local production is higher as compared to International

standard/price.
o Sugar being an essential commodity, Government monitors its sale prices.
• Liquidity Risk
o Fixation of high prices of sugar cane to support farmers by Government.

o Ban by Government on export of sugar.
o High sugar cane price due to shortage of water / other adverse conditions.
o Inter-provincial ban on movement of sugar by Government.
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Structuring Working Capital Limit
Cash Finance
• Cash Finance to sugar mill is provided keeping in view the production capacity
and lending principles.
• Security: Pledge of Sugar Stocks.
• Margin (Minimum): 15% (Relevant Business Group Head may reduce the same
to 10%).
Working Capital Requirement:

Working Capital requirement of Sugar Mill should be calculated on the basis of
their refined sugar production capacity after taking into consideration the operating
capacity.
Limit for a Sugar Mill must not exceed 25 % of the last year’s refined sugar
production.
Working:
Crushing Capacity 5000 TCD
No of days in operations 160 days
Recovery % 10 %
Sugar Cane crushed 8,000,000 Tons
Refined Sugar produced 80,000 Tons
Price per tons PKR 22,750/=
Total 1820 M
CF limit to be allowed 1820 X 25 % = PKR 455M
Operating capacity of the Mill must also be taken into account i.e. if a mill is
operating at say 60 % of the capacity the CF limit may be calculated as follows:
Crushing Capacity 5000 TCD

No of days in operations 160 days
Recovery % 10 %
Capacity utilization 60 %
Sugar Cane crushed 480,000 Tons
Refined Sugar produced 48,000 Tons
Price per tons PKR 22,750/=
Total 1092 M
CF limit to be allowed 1092 X 25 %= PKR 273 M
Running Finance
Any hypothecation based line (Running Finance) must not exceed 15 % of the
approved CF limit at any given point in time. However, in exceptional cases
hypothecation based exposure can be allowed to the extent of 25 % of the approved
CF line as an independent line subject to following conditions:
• Established track record of at least five years.
513
• No instances of any past due / overdue / default.

• Collateral does not include agricultural land.
• Financial Leverage (Total liabilities / net worth) does not exceed 3 X in the latest
audited financials (in case of breach of this covenant in future, Hypo based limit
will be revisited to brought it down up to 10 % of the approved CF line for the
next season.
• No losses are reported in the last two years.
• Clean up requirements are meticulously followed.
Import of Sugar
• Non-Fund Based: As per SBP restriction, banks are not allowed to open L/C on
Usance basis. However, Sight L/C may be opened retaining adequate margin.
• Fund Based: FIM against imported sugar stocks to be considered on merit and
shall be subject to SBP minimum margin requirement for advances.
Export Finance
Normally, sugar is not exported. However, when Government permits export,

request for such financing to be considered on merit. The SBP minimum margin
requirement as applicable to advances shall apply.
Margin
Minimum margin requirement for financing against Sugar must not be less than
15% and in case SBP imposes a higher margin the same would supersede our
internal requirement.
Where margin requirement specified by Sanctioning Authority is other than 15%,

the drawing power shall be calculated accordingly.
Financing to be allowed on the basis of bench mark-price advised by Credit Risk

Control Division, however, where wholesale price quoted in the local market or
invoice price is below the BMP , the same shall apply and immediate step should be
taken by General Managers/ Regional Managers / Branches to ensure adjustment
to cover the shortfall.
Monitoring
• Renewal of Working Capital / Cash Finance limit shall be subject to complete

adjustment and payment of up-to-date Mark-up / Installments / Dues.
• The Branch/ Relationship Manager should make random periodic unannounced

and detailed inspections during the peak months and at the end of the season
of the pledged stocks; Inspections should be scheduled as per schedule
mentioned in Appendix IX to Chapter 5.1 Where finance is allowed from more
than one branch, the control point should ensure the goods under Bank’s lien is
in conformity to the overall limit amount. General Manager / Regional Managers
should also visit the mill premises in the peak season for the inspection of plant
514
& stocks under pledge / hypothecation of the bank. General Manager however,
would be responsible for effective monitoring & stock inspection.
• In addition, the Bank selects and posts a Muccadum from the list of approved
Muccadums who provides continuous security for the sugar.
• The stocks pledged should remain insured against all pertinent risks.
• However, it should be ensured that the last season’s stock do not remain under
bank’s pledge.
• Proper storage / control should be exercised in this respect, so that mills make
adequate arrangement for sale / disposal of stocks produced / procured by
them within aforesaid period.
• It must be ensured that the purpose of CF must be clearly determined.
• Storage capacity should be properly ascertained prior to allowing any financing

especially in multi-bank environment.
• Where possible, joint inspection of stocks in respect of Sugar Mills availing

financing from more than one bank should be arranged periodically. Where
stocks against multiple borrowing are stored at same premises, mill will be
asked to disclose quantum of stocks pledged with other Banks / FIs on stock
report.
Draw-down / Clean-up
• Draw down to be allowed only during crushing season i.e. from November till
April.
• In case disbursement is made more than 30 days after close of the crushing
season of the mill. Specific permission for the same must be obtained from
Sanctioning Authority / business Group Head, whichever is lower.
Clean Up of the limit to be achieved latest by 15th of November or at least 15 days

prior to commencement of next crushing season, whichever is earlier;
Following schedule for cleanup would be mandatory:
30th September 20 %
31st October 60 %
15th of November / 15 days prior to commencement of new crushing season,
100 %
whichever is earlier
Clean up should be achieved as a percentage of approved limit unless otherwise

restricted by SBP, internal circulars or specifically mentioned in approval of
finance. If clean-up is not achieved as per the above schedule, the account shall be
watchlisted and lines frozen.
515
Financing Price
The Bench Mark Price and Drawing Power notified for Refined Sugar, by CRC from
time to time shall be adhered to.
In case of imported sugar, landed cost or BMP of local sugar (whichever is lower)
shall form the basis.
Drawing Power Position
• The Drawing Power is to be determined on weekly basis.
• Any shortfall in margin must be covered within 7 days by reducing outstanding

or obtaining additional bags as per the calculated shortfall. On the eighth day,
limits to be restricted according to the Drawing Power and approval must be
taken for the excess thus created.
Insurance
Appropriate insurance policy must be obtained keeping in view the goods under
open pledge. The policy / policy cover note should clearly mention that the insured
stocks / assets are stored in open and there should be no restrictive clause
regarding such storage arrangement to avoid any dispute in the event of any claim.
516
6.4.2 Working Capital Financing To Rice Mills
Concept
Rice Mills (Husking / Processing Units) / Traders require financing for procurement
of Paddy, its processing and against semi-finished product (Brown Rice) or finished
product (Rice). Traders / Exporters require financing for purchase of rice, its
storage for curing (Quality of rice improves with storage, provided properly stored &
fumigated) and/or awaiting its sale. Rice storage should usually not be allowed
beyond 90 days in case of traders. However, processing and exporting units may be
allowed for longer period depending upon their business cycle. Delay do not
adversely affect the quality of supreme quality rice if properly stored, however, it
becomes un-economical if storage period extends to commencement of next season,
due to holding costs. In case of exports, financing need may be extended to receipt
of export proceeds. Traders shall be discouraged to avail financing against pledge of
paddy / rice as a matter of policy.
Transaction Sequence
• Rice Mills purchase paddy and require finance to pay to Farmers / Zamindars /
Middlemen.
• The Paddy is stored in open within mill premises under Bank’s pledge in
custody of Bank’s approved Macadam, where-after finance is released
proportionate to its value retaining margin on receipt of stock report from
Bank’s approved Muccadum.
• The pledged paddy is spread and dried in sun and / or in drier. It takes about 7
days in case of sun drying and 3 days in case of drier. Dried paddy is stored
either in open or sheds / godown in heaps.
• Thereafter, paddy undergoes the following process.
i) Paddy Pre-cleaner Cumby ii) Red Machine with Grader

iii) Paddy Separator iv) De-stoner
v) Chaki vi) Elevator
vii) Electric Panel viii) Air Compressor
ix) Rotary Flat Sieve
In bigger units processing export quality rice, following modern machines are
additionally available:
o Air Dryer with Dust Fans.

o Polished Shining Machines.
o Grading and Colour Sorting.
o Whitening Machine / Length Grader etc.
It takes further 2-3 days for the aforesaid finishing, packing into bags and
placing in godowns under Bank’s lock & key.
517
• Rice produced is usually packed in Jute Bags of 100 Kgs and stored in godown
under lock & key. Exportable rice is pledged in 5 Kgs bags X 10 per pallet, 20
Kgs bags & 50 Kgs bags.
• When obligor wishes to sell the pledged rice, it repays the Bank, who then
issues the Delivery Order (D.O.) to the obligor, who presents it to Muccadum for
release.
• For shipment to sea-port for exports, borrower may require delivery against
transit limit (transport under supervision of Bank’s approved clearing agent)
and also post-shipment facility against export documents. Proper approval for
such arrangement should be obtained from relevant approval/ review authority.
Major Risks
• Price Risk:
There are chances that adverse changes in local price of rice may reduce the
coverage of our loan. In case of exportable rice, price may fall in international
market in case of bumper crop in other rice growing countries. Our margin and
periodic monitoring of rice prices (Local or International, as the case may be)
mitigates the risk.
• Liquidity Risk:
There is a risk that obligor fails to repay, as it may not be able to find proper
buyer or receipts of export proceeds may be held-up due to dispute over quality.
Demand of rice being inelastic mitigates risk.
• Operational Risk:
The quality of rice may deteriorate due to improper storage / fumigation or
forced lifting of pledged stocks or fire or damage due to flood or rain. Proper
Muccadumage, fumigation, insurance cover, stock inspection or pre-inspection
clause in case of exports mitigates the risk.
Husking Units
• Limit Size / Nature
o Financing requirements starts in the months of September (for those who

deal in Coarse Rice) and October (for those who deal in Superior Rice).
o Limit amount for each party is determined in view of their capacity and
offered collaterals.
o RF against hypothecation of stocks / TRF for 30 days may be allowed up to

5 to 10 % of CF limit (by reducing the same by like amount or within CF
limit) to large / reputable units against hypothecation of stocks(other than
pledged stock) of Rice/ Paddy/Sacks provided value of collateral provides
125 % coverage to this RF/TRF exposure.
518
However, in exceptional cases hypothecation based exposure (RF/ FATR) can

be allowed to the extent of 25 % of the approved CF line as an independent
line subject to following conditions:
Established track record of at least five years.

No instances of any past due / overdue / default.
Collateral does not include agricultural land.
Financial Leverage (Total liabilities / net worth) does not exceed 3 X in
the latest audited financials (in case of breach of this covenant in future,
Hypo based limit will be revisited to brought it down up to 10 % of the
approved CF line for the next season.
No losses are reported in the last two years.
Clean up requirements are meticulously followed.
• Determination of CF limit (for Husking Units only)
Plant’s husking capacity, actual capacity utilization in last three years and
storage capacity are three key determinants for estimation of CF limit for Rice
Husking Unit. All proposals of rice husking customers shall contain detailed
information on below mentioned pattern for all Husking units,
Husking Capacity shall be calculated as under:
500 Bags Paddy each Bag containing 65 Kgs or

I Plant Husking Capacity.
32,500 Kgs per day.
Ii Estimated Price of Paddy per KG. Rs.650 per 40 Kgs (say)
32,500 Kgs X
Total value of the Paddy in Husking
Iii Rs.350/- = Rs.0.528 M
Process per day.
40
Production Period 150 days Mills husking period.
Iv
(i.e. October to March) 32,500 Kgs X 150 days = 4,875,000 Kgs
4,875,000 Kgs X
Total value of the Paddy to be
V Rs.650/- = Rs.79.218 M
Processed / Converted into Rice.
40
Maximum CF limit that could be
Vi allowed. @ [25% of production Rs.20.000M for Paddy and Pledge of Rice.
capacity.
o Capacity Utilization (the same is required to be verified from last three years
production records (i.e. No of bags of paddy husked per day) and an average
capacity utilization of at least last two years must be considered. for
calculating working capital requirements. However, in case husking Unit is
forecasting an increased capacity utilization in coming season, the same can
be taken into account provided there are due justification for the same.
o Storage Capacity.
Processing Units / Exporters / Composite Units
• For processing units, rice processing capacity, capacity utilization and storage
capacity must be taken into account for calculating working capital
requirements. All proposals of rice processing customers shall contain detailed
information on below mentioned pattern for all processing units,
519
Processing capacity shall be calculated as under,
2000 Bags with each Bag containing 100 Kgs or

i Rice Processing Capacity.
200,000 Kgs per day.
Ii Estimated Price of Rice per KG. Rs.1100 per 40 Kgs (say)
Total value of the Rice Processed per 200,000 Kgs X Rs.1100/-
Iii = Rs.5.500 M
day. 40
Iv Production Period 200,000 Kgs X 350 days = 70 M Kgs
Total value of the Rice Paddy to be 70,000,000 Kgs X Rs.1100/-
V = Rs.1925 M
Processed. 40
CF limit required. @ [50% of
Vi Rs.962 MM for Paddy and Pledge of Rice.
production capacity
• Please note that following factors shall be kept in mind while calculating the
working capital limit for a processing unit.
o Capacity Utilization (the same is required to be verified from last three years
production records (i.e. No of bags of Rice processed per day) and an average
capacity utilization of at least last two years must be considered. for
calculating working capital requirements. However, in case processing Unit
is forecasting an increased capacity utilization in coming season, the same
can be taken into account provided there are due justification for the same.
o Storage Capacity.
• Details of CF and Export Finance Limits
I Cash Finance Against open pledge of Paddy for husking purpose.

Against open pledge of Paddy and effective pledge of Rice with
Exp. Ref. P-I
Ii stock in transit facility for shipment abroad duly covered
(Pre-shipment)
against Export LCs / Export Order.
Exp. Ref. P-I Against Export Bills Sight / DA (90 days covering shipment of
Iii
(Post-shipment) rice).
Finance against Foreign Bills drawn under LC Sight or DA /
Iv FAFB
Confirmed Order.
Against Hypothecation / Open Pledge / Pledge of Exportable
V Exp. Ref. P-II
Rice duly covered with Export LCs.
Vi FBP Negotiation of Sight / DA LCs.
Tender Guarantees/ International Buyer at Government level also demands such
Vii
Performance Guarantees Guarantee to finalize Export agreements.
• While determining limits, following shall also be kept in view:
o Previous utilization of the limit(s) and its timely adjustments with up-to-date
payment of mark-up.
o Off-season deposits maintained with branch.
o Reputation and dealing of borrower in market.
o Overall industry dynamics
o Godown Capacity of the mill as well as safety & security of pledged stock in
the godown.
520
o The location of mill vis-à-vis possibility of damages to stocks due to flash

flood / rain water flow [Further collateral security may be obtained where
necessary].
o The aforesaid working capital restrictions would not apply on post-shipment

finances, which are on secondary risk basis i.e. backed for clean export
documents drawn under L/Cs.
o However in case of post-shipment, primary risk based exposure (i.e.

discrepant / contract based line), the same must not preferably exceed 20 %
of the approved post-shipment line. And to be backed by mortgage of fixed
property / mill premises providing collateral coverage of 125 %. However, in
case of pledge arrangement collateral requirement be relaxed to 25 %.
Primary Security for CF Limit
Open pledge of Paddy and Rice stored in godowns under Bank’s lock and key.
Usually rice packed in standard weight bags shall be eligible.
Secondary Security for CF Limit
Fixed property - mill premises or urban property.
Margin
• Paddy: 25%
• Rice in standard weight bags: 20%
• Collateral fixed property or mill premises: 25 % for Pledge, 125 % for Hypo based
exposure
Monitoring

adjustment and payment of up to date mark-up / installments / dues.

Muccadums who provides continuous security for the cotton and the enclosure.
521
• The stocks pledged should remain insured against all pertinent risks.
• Proper storage / control should be exercised in this respect, so that mills make
adequate arrangement for sale / disposal of stocks produced / procured by
them within aforesaid period.
• It must be ensured that the purpose of CF must be clearly determined.
• Storage capacity should be properly ascertained prior to allowing any financing

especially in multi-bank environment.
• Draw-down / disbursement against CF limit to be allowed between September

to June against stocks of fresh/same season’s crop only. In case of paddy, the
draw down period to be restricted up to March.
• For annual clean-up of advances to Rice Husking Units / Mills only, following
schedule must be followed:
Month Cumulative Adjustment

Paddy Rice
April 50% -
May 70% 20%
June 100% 40%
July - 60%
August - 80%
September - 100%

finance. Remaining old stock, if any, should be cleared within next 30 days
(subject to business Group Head approval) or further disbursement against new
season’s Rice / Paddy be suspended. Additionally, the account shall be
watchlisted and lines frozen.
For rice processors / exporters, clean up requirement would not be mandatory,

however, each tranche against rice must be adjusted within 9 months from the
date of initiation (may be extended up to 1 year by concerned business Group
Head). The maximum financing period for each tranche to be as under:
• IRRI – 6 / Qualities not mentioned below: 60 days
• IRRI – 9 / Saila / Basmati / Karnal: 180 days
• In case Rice processor is not an exporter or exporting only 25 % of their

production, in that scenario, all Rice Processors should clean up their working
capital lines except for post-shipment finances latest by 31st October ever year
and cleanup of hypo based lines shall be ensured as per requirements
mentioned in credit handbook for various hypo based facilities.
522
Financing Price
Benchmark price of rice / paddy stocks pledged with bank shall be circulated by
CRCD. Drawing Power shall be calculated on the basis of benchmark price circulated
by CRCD or the sales invoice price of the mill, whichever is lower.
In those cases where business unit intends to offer special rates to their top tier clients
for exportable quality rice, approval may be sought at the level of Group Head- RMG
on a case to case basis. Such requests shall be routed through Head CRCD and shall
carry recommendations of respective Business Group Head.
Based on above and the margin applicable, the drawing power be ascertained. In case
of fall in prices, the drawing powers should be adjusted accordingly. In case of any
increase in price, the valuation of stocks already held shall not be revised upwards.
• The Drawing Power to be determined on weekly basis.
• Any shortfall in margin must be covered within 7 days by reducing outstanding

or obtaining additional quantity as per the calculated shortfall. On the eighth
day, limits to be restricted according to the Drawing Power and approval to be
taken for the excess thus created.
• Requirement for frequency of Stock Reports from Muccadum and tallying it with
a pledge register is monthly and on each receipt / delivery.
Insurance
Appropriate insurance policy must be obtained, where goods are under open
pledge, the policy / policy cover note should clearly mention that the insured
523
6.4.3 Working Capital Financing to Flour Mills and Traders
Concept
Financing for procurement of Wheat by Government Agencies had reached to tune

of Rs.40–45 billion. With the paradigm shift in Government of Pakistan’s Policy to
encourage Private Sector, Banks are required to gear-up their financing to Private
Sector for the purpose. Financing to Private Sector against Wheat up till now had
been mostly limited to flour mills to support the procurement of wheat by them
from Provincial Food Department / PASSCO (Pakistan Agriculture Storage &
Supplies Corporation) and lately against procurement from market as well. The
Government initially estimates that financing requirement by private sector shall be
around Rs.10 billion. The paradigm shift may be diagrammatically shown as under:
Existing Envisioned
Farmer Farmer
Middle Middle
Wheat
Man / Man /
procureme
Anaj Anaj
nt Centres
Mandi Mandi
Wheat Local
Govt.
procureme Storage /
Agencies
nt Centres Silos
Govt. Private Exports

Godowns
Export
Flour Mills Flour Mills
Silos
Whole
Whole Sale EXPORT
Sale /
/ Retail SHIPMENT
Retail
Apart from Commodity Operation Finance (COF) to Public Sector Enterprises

(PSEs); Bank extends financing to private sector against wheat to flour mills, wheat
traders and exporters and wheat silos / storage facility operators.
Transaction Sequence
• To facilitate self-liquidation, it is prudent that financing is allowed against the

pledge of wheat and financing against finished stock (flour) is kept at minimum.
• The obligor procures wheat from Food Departments / PASSCO / Market.
• The wheat so procured is pledged by the obligor under charge of Bank’s
Muccadum in a godown. In case of Flour mills within Mill premises.
524
• When obligor wishes to use / sell pledged wheat / flour, it repays the bank.
Bank issues a Delivery Order (DO) to the obligor who presents it to Muccadum
for release of wheat / flour.
Major Risks
• There is a risk that delay in sales may adversely affect prices, leading to
reduction in coverage.
• Subsequent bumper crop may lead to glut in market, impacting price / margin.
• Improper fumigation / storage arrangement may lead to deterioration in quality.
• There is a risk that obligor may fail to liquidate Bank’s exposure against wheat.
• Being a staple food item, price control by Government limits its liquidation value
and at the same time procurement costs may be jacked-up by Government’s
Support Price.
• Inter-province ban on movement of wheat are enforced from time to time.
• Our margin and periodic monitoring of wheat prices and persuasion for timely
adjustment mitigate the risk.
• Inelastic demand mitigates the risk.
Cash Finance
• Determination / assessment of CF limit for flour mills:
The following points are required to be taken into account:
o No of roller bodies installed.

o Capacity Utilization.
o Average Crushing capacity of per roller body.
o Storage capacity.
CF limit to any flour mill must not exceed 60 days of the wheat crushing
capacity subject to the availability of the adequate storage capacity. Following
calculations must be provided in Credit Proposal of each Floor Mill,
Example:
No of roller bodies: 10
Capacity Utilization: 100 %
Average Crushing capacity of per roller body: 200 bags (100kg) of wheat.
60 days crushing requirement: 10 X 200 X 60 = 120,000 bags {100kg) 0f wheat
Price per 100 kg bag of wheat (subject to change) – PKR 1100/=
525
Working Capital Requirement; 120000 X 1100 = PKR 132 M
Note:
Incase storage capacity does not match with the requirement the limit must be
curtailed accordingly
• Finance to be allowed for procurement of wheat against pledge of wheat stocks,

to be stored in mill premises. Where, finance has to be allowed to traders the
same is to be stored in secured godowns. Flour Mills shall be accorded
preference while extending finance against wheat stocks.
Where in exceptional cases finance against flour stocks has to be allowed to

flour mills, the same shall be allowed against its pledge and not to exceed 10%
of the CF limit. Finance to traders against Wheat flour is banned, as per existing
SBP restriction.
Movement and proper storage / fumigation / insurance cover for wheat stocks
under our pledge should to be essential condition of the CF limit. In case of
flour stock, there should be a stipulation that the same is not held for more
than 15-30 days.
The tenor of facility for Millers shall be 1 year and eight months for traders.
Running Finance
Where financing has to be allowed against hypothecation of wheat / flour stocks &
/ or gunny bags stored in mill premises, the same may be allowed by sanctioning
authority not below the level of RM within their power for grant of finance against
hypothecation.
DD/TT for goods in transit up to 10% of C/F limit may be allowed to very good
customers but should not exceed the value of 100 to 200 bags at any one time,
subject to close monitoring. Inclusive of T/R for a period not exceeding 30 days, the
same should not exceed 10% of C/F limit. The T/R facility should be backed by
collateral. To be considered for good clients only, to facilitate them in export of good
under the supervision of Bank’s approved C&F Agent.
NOTE: DD/TT in transit facilities shall be obviated where R/F limit is allowed.
RF / in transit limit must not exceed 10 % of the approved CF limit at any given
point in time.
However, in exceptional cases meeting the following criteria hypothecation

based exposure can be allowed to the extent of 25 % of the approved CF line
as an independent line:
526
• Financial Leverage (Total liabilities / net worth) does not exceed 3 X in

the latest audited financials (in case of breach of this covenant in future,
Hypo based limit will be revisited to brought it down up to 10 % of the
approved CF line for the next season.
RF against hypothecation can also be availed against wheat products i.e. stock of
flour, maida, suji, bardana and choker stored in mill premises, stores and spares
and receivables can also be taken for joint stock companies.
RF limit may also be approved as an independent limit.
Margin
• Minimum Margin on CF for Flour Mills - 10 % or as per SBP directives

whichever is higher.
• Minimum Margin on CF for Traders - 15 % or as per SBP directives whichever is

higher.
• Minimum margin of 25 % must be kept under RF.
Security
• Pledge of wheat / flour stocks.
• Collaterally secured by exclusive charge / mortgage of mill premises / property

at least valuing 25% of limit in case of pledge and 125% in case of
hypothecation.
• Charge on current and fixed asset to be immediately registered with SECP in

case of Limited Companies.
Other Limits
Limits other than above, to be allowed after proper assessment. Export financing
request, with buyer nominated pre-shipment inspection to be encouraged. In case
of import financing of wheat proper clearance arrangement from port, storage
arrangement, impact on local price and its marketability to be assessed while
considering the financing requests.
Monitoring

adjustment and payment of up-to-date mark-up / instalments / dues.

527

Muccadums who provides continuous security for the wheat and the enclosure.
• Stocks pledged should be insured against pertinent risks.
• Proper attention to be given to movement of stock, storage arrangement, its

maintenance / up keep, sealing of godowns against rodents / birds / moisture
and fumigation. Special precaution is required where stocks to be stored for
longer period.
• Vigilance should be exercised to ensure that old & substandard / decayed

stocks are not placed under our pledge.
• Wheat and other stocks should be properly stacked by the customer and to be
stored in the godown considered safe from damage or rain-falls, flood and fire.
Special vigilance / supervision to be kept in flood season by Managers /
Regional Managers.
• Customer should place / store wheat in the fields / godowns which are not
located in main flood affected area. Godowns should be cemented, safe and
secured. If godowns are located in flood-affected area, the party will be liable to
bear the entire loss, if so occurred and the collateral offered should be strong.
• Holding of list of machinery duly insured showing original / depreciated value

with date of purchase, in case of flour mills.
• Financing against flour stocks should be avoided. Moreover, movement and

proper storage / fumigation arrangement of Wheat Stocks under our pledge
should be ensured to avoid any damage to the Stock. Wheat Stocks placed
under our pledge except those stored in silos should be in gunny bags/other
standard packing, with known standard weight. Necessary insurance coverage
must also be obtained. Where, in exceptional cases finance against Flour Stocks
has to be allowed, the same should not exceed 10% of total CF/RF limit against
pledge of Wheat and the Flour Stocks should not be allowed to be held for more
than 30 days. Where financing against wheat stored in silos is allowed it should
be ensured that there exists proper arrangement / plan for air circulation /
aeration / fumigation and proper calibration chart is in place for determining
the quantity/weight, which should be certified by a firm of engineers on the
panel of Bank’s Valuers.
• Draw down / disbursements usually allowed during wheat procurement season

(which usually lasts from May to November) against stocks of fresh crop only.
528
• Each tranche in case of wheat usually not be allowed to be stored for more than
60-90 days (may be extend to 180 days by Group Heads) and in case of flour
stocks for not more than 30 days.
• At least 15 days clean-up to be ensured.
Financing Price
• As per Government Agencies’ procurement price or market price, whichever is

lower. Where rates are advised by CRC, the same shall apply.
• It should be kept in view that during wheat harvesting season price of wheat
falls substantially.
• The Drawing Power is to be determined on weekly basis in terms of CRCD

circulars issued from time to time.
• Any shortfall in margin must be corrected within 7 days by reducing

outstanding or obtaining additional wheat bags as per the calculated shortfall.
On the eighth day, limits to be restricted according to the Drawing Power and
approval should be taken for the excess thus created.
• Requirement for frequency of Stock reports from Muccadum and tallying it with
a pledge register monthly and on each receipt / delivery.
Insurance
Appropriate insurance policy must be obtained. Where goods are under open
pledge, the policy / policy cover note should clearly mention that the insured
529
6.4.4 Working Capital Financing To Cotton Ginners
Concept
Cotton ginners require working capital financing for procurement of Phutti / Seed
Cotton, its processing and to finance ginned cotton awaiting sale. To facilitate self-
liquidation of Bank’s exposure, it is prudent that financing to support storage of
finished product (ginned cotton) is kept at minimum. The cotton ginning operation
is simple and its processing time is short, thus funds held for work in process is
negligible. Hoarding of the same for speculative price increase with the help of
Bank’s financing is discouraged, therefore Bank’s financing should be limited to
productive purposes only.
However, to profitably utilize its by-product (cotton seed) a ginning unit may also
have oil expelling unit within its premises, operations of which may also be
financed by the Bank.
Cash Finance - Cotton
C/F cotton limits may be estimated at 25% of last season’s production, valued at
the rates conveyed by CRCD on fortnightly basis less sales tax and margin.
However, the same may be based on production capacity duly assessed, but in no
case limit for the next season be allowed / approved in excess of 50% of the last
year’s production for the existing mills (including MCB’s existing clients & fresh
solicitations) and as far as new mills, (who have just started their operations and
in the first year of their commercial run) are concerned initial limit must not exceed
25% of the actual productions capacity duly assessed.
Determination / assessment of CF limit for Cotton Ginning mills; Following things

are required to be taken into account:
• Number of saw ginns installed.

• Average ginning capacity per saw ginn.
• Capacity Utilization.
• Storage Capacity.
Margin Requirement:
For Phutti, 20% and for lint cotton 20%, at valuation as per CRC Circular or invoice
price, whichever is lower.
Security:
Pledge of Phutti and ginned cotton. In addition, collateral of factory premises is

usually obtained. However, if the ginning operation is in a factory, which is hired
on lease and mortgage of the factory is not possible, sufficient collateral should be
obtained.
530
Trust Receipt Finance - Cotton
TRF facility within CF may be approved for 10 days on revolving basis for disposal
of lint cotton bales as under:
• For CF limit up to Rs.20.00M − 1 Lot (100 Bales)

• For CF limit over Rs.20.00M − 2 Lots (200 Bales)
• For CF limit of Rs.50M & above − 5 Lots (500 Bales)
Running Finance - Cotton
An RF facility for meeting day to day working capital requirements & purchase of
fertilizers & pesticides for onward supply to the growers is allowed to the extent of
10 % of the approved CF limit only.
In case TRF facility is also allowed in addition to RF, total exposure against TR and
RF must not exceed 15% of the approved CF limit.
Preferably RF & TRF facility may be allowed as a sub limit of CF. However, in
exceptional cases meeting the following criteria hypothecation based exposure can
be allowed to the extent of 25 % of the approved CF line as an independent line:
next season.
Cash Finance - Oil
For Oil Mills attached to ginneries, working capital limit i.e. CF-Oil may also be
determined as per actual production capacity (capacity utilization of at least last
two years must also be taken into account in this scenario), however in no case the
limit to exceed 25 % of the actual assessed production capacity of the oil mill i.e.
seeds crushing capacity.
531
For independent Oil Units working capital limits i.e. CF Oil must not exceed 50% of
the actual production capacity (capacity utilization of at least last two years must
also be taken into account in this scenario).
Prime security under said line will be only stocks of oil (cotton seed oil) with margin
of 25%.
Running Finance - Oil
Hypothecation based facilities, i.e. RF / TRF / in transit facility, must not exceed
10% of the approved pledge based line.
However, in exceptional cases meeting the following criteria hypothecation based

exposure can be allowed to the extent of 25 % of the approved CF line as an
independent line:
next season.
Determination / assessment of CF limit for Oil mills; Following things are required
to be taken into account:
• Number of expellers installed.

• Capacity Utilization.
• Average crushing capacity per expeller.
• Storage capacity.
Cash Finance – Oil Cake
CF-Oil Cake facility to Cotton Ginners / independent oil mills may be allowed
subject to following conditions:-
532
• The line would be in addition to existing CF-Oil limit.
• Prime security under said line will be only stocks of oil cakes with margin of
50%.
• Exposure would not increase 10% of approved CF (Cotton Ginning) and 50% of
CF (Oil) in case of independent oil expelling / extracting units.
• Exposure under CF (Oil Cakes) would be collateralized against fixed assets
• Clean-up period of at least 15 days must be observed before allowing exposure

under CF-Oil Cakes for the next season.
Cotton seed may also be included as security for the advances to ginners. Margin
against cotton seed should not be less than 25%.
Oil being “finished good”; each batch should not be allowed to remain under Bank’s
pledge for more than 90 days.
The sanctioning authority shall keep in view the above guidelines while analyzing
the limits to be allowed to cotton ginners and oil mills.
Ginners who have not cleared their last season’s dues should not be extended any
further finance unless and until they have liquidated their old outstanding
balances. For shortfall in their account, due to losses in the preceding season or
any other reason, the borrower must provide private properties or other collateral of
sufficient value to secure the outstanding and give a satisfactory repayment
program, preferably not exceeding one year to be eligible for consideration for
financing for the ensuing season. Such arrangements should have prior approval
from at least Head RMG.
At the time of grant of advances to ginners/Oil Mills, their plans for disposal/sale
of cotton, cottonseeds & oil cakes should be ascertained and discussed. The
ginneries/Oil Mills should indicate their ginning /production capacity, the quantity
of cotton ginned/oil produced during last year and the quantity they expect to
gin/produce during the ensuing season. The ginners/oil mills should also provide
estimates of their planned ginning/oil expelling and production, sale of cotton bales
and quantity of oil each month during the season. After documenting above and
allowing for overhead and possible cotton/cotton seed/oil and oil cakes price
fluctuations, reasonable credit limits should be laid down for each ginner/oil mill
so that bank finances are not used for speculative purpose.
Mortgage of Agricultural land should be discouraged.
Monitoring
• Care should be taken to ensure that credit extended by the Bank is not diverted
or utilized for speculative purposes. In such cases, facilities extended should be
suspended immediately and advances should be recalled.
533
It should be ensured that large stock of finished goods (i.e. Lint Cotton) stocks
are not held against Bank’s financing and ginned cotton bales under bank’s lien
should not exceed 10 days production or 2000 bales, whichever is higher.
Movement of Phutti stocks should be ensured and in no case Phutti be allowed

to remain under Bank’s finance for more than 60 days.
• Regional / General Managers should ensure that each ginner falling within their
geographical area is visited at least twice during the season. While conducting
their examination, the inspecting teams should ensure that:
o The advances outstanding are adequately secured against proper quality

stocks, valued conservatively as per Phutti and lint cotton’s Principal Office
advised valuation / guidelines and against the prescribed margin.
o There is no build-up of large stocks. For this purpose the monthly estimated
ginning production and sale schedule should be kept in view and its should
be ensured that the stocks of both Kappas and Cotton bales at the time of
checking are not materially different from the schedule.
• A written report should be given to the General Manager by the inspecting

teams for each of their visits to the ginners and the General Manager should
initiate and implement corrective measures in case of any adverse
developments. In particular the Regional Manager and General Manager should
satisfy himself to ensure timely liquidation of all advances by each ginner by the
close of the ginning season.
• Weekly statement of seasonal financing as per Appendix I to Chapter 6.4 should

be regularly reviewed by controlling offices in the business group to ensure its
proper reporting, adequacy of security held, movement of stocks and monitor
timely adjustment.

in conformity to the overall limit amount. Random weighing of bales should also
be carried out during the inspection. Stock of Phutti released for ginning and
production of the day should be matched to ascertain conversion rate. General
Manager / Regional Managers should also visit the mill premises in the peak
season for the inspection of plant & stocks under pledge / hypothecation of the
bank. General Manager however, would be responsible for effective monitoring
& stock inspection.
Muccadums who provides continuous security for the cotton.
534
• Drawdown against C.F. (Cotton) limits shall usually be allowed between August
and February against stocks of fresh crop only.
• Annual clean-up should be conducted to reduce / adjust advances to cotton

ginners / oil mills month-wise as under:
Month Cumulative Adjustment

Ginners Oil Mills
March 25% -
April 50% 50%
May 75% 75%
June 100% 100%

finance. In exceptional cases, Head of Business Group may consider extension
of cleanup period up to July 30, on case-to-case basis and approve /
recommend accordingly with due justification, provided total outstanding has
since been reduced to 25 % of the approved limit.
If clean-up is not achieved by the extension period, the account shall be watch
listed and lines frozen.
Independent Oil Expeller/Solvent Extraction Units
In case of independent oil expeller/solvent extraction units 15 days’ cleanup is

mandatory before expiry/ renewal/draw-down for next season.
The aforesaid condition of 15 days cleanup is not required provided the

independent oil expeller / solvent plants are also involved in crushing of imported
seeds / seeds other than cotton seeds.
In the aforesaid scenario each tranche must be adjusted within a maximum period
of 90 days.
However Business Group Heads or Relevant Credit Sanctioning Authority within

the business group may allow relaxation of another 5 days provided there are due
justification for the same.
Co-Ginning
C/F Cotton limits in case of co-ginning by different entities at same factory may be
allowed with the written consent of the business Group Heads, subject to
fulfillment of the following further safeguards:
• Co-ginning is restricted to MCB borrowers only and no other bank is involved.
• Finance of each Co-ginner is covered by sufficient collateral (at least 50% of

combined limit) besides pledge of stock providing required margin.
535
• The control over the stock would be separate and ensured by the Manager and
Regional Manager.
• Field / Audit Staff to exercise extra ordinary vigilance and frequent visits to the
factory.
• This concession shall be immediately withdrawn where any shortage in pledged

stocks is detected or mixing of pledged stock is found during the course of
inspection.
• A letter of disclaimer should be obtained from the Co-Ginner who is the owner
of the property / factory.
• Owner’s undertaking to the effect that co-ginning shall not be allowed to other
than MCB borrowers to be also obtained.
Financing Price

• The drawing Power to be determined weekly on the basis of CRC determined

prices.

outstanding or obtaining additional bales as per the calculated shortfall. On the
eighth day, limits to be restricted according to the Drawing Power and approval
shall be taken for the excess thus created.
Insurance
Appropriate insurance policy must be obtained keeping in view the fact that goods
are under open pledge. The policy / policy cover note should clearly mention that
the insured stocks/ assets are stored in open and there should be no restrictive
clause regarding such storage arrangements to avoid any dispute in the event of
any claim. It should also cover stocks in process and in the press.
536
6.4.5 Working Capital Financing To Textile Mills
Concept
Textile industry is divided into various different segments. These segments can be
broadly categorized as follows:
• Ginning (already discussed in previous section)

• Spinning
• Weaving
• Knitting
• Processing / Finishing
Brief introduction of each segment is as follows:
Ginning: It is the process of converting raw cotton/ phutti into lint cotton. The
process involves separation of cotton seed from cotton fiber/ lint.
Spinning: It is the process of converting lint cotton into yarn. A typical conversion
involves the following main processes/ steps:
• Blow Room (beating action on cotton to remove external material/ impurities)
• Carding (conversion of cotton into sliver)
• Combing (removing entanglements and short fibers)
• Simplex/ Roving Frame (conversion of sliver into roving)
• Ring Frames (Ring frames have spindles which determine capacity of the
spinning unit. They convert roving into yarn. The capacity of spinning unit can
be assessed in terms of number of spindles)
• Autoconer (Yarn from ring frames comes on small size packages. Autoconer
converts the yarn on small size packages to large packages called cones, which
accommodate large lengths of yarn.)
There can be several alterations to the above mentioned process. For example if the
combing process is not carried out, it would result in production of a yarn type
called ‘carded yarn’. In case the combing action is carried out it would result in a
type of yarn called ‘combed yarn’.
Another alteration can be an open end spinning process. In open end spinning
process ring frame and simplex/ roving frame do not exist. Sliver from Carding is
directly converted into yarn by rotors. Rotors determine the capacity of an open end
spinning process as opposed to spindles determining capacity for a ring spinning
process.
Specification of yarn is indicted in terms of its count, which is defined as length per
unit of weight.
537
Weaving: It is the process that follows spinning and involves conversion of yarn into
grey cloth/ fabric. Weaving process primarily involves the following main steps:
• Warping: (conversion of yarn on cones, received from spinning, to yarn on big

beams.)
• Sizing: (application of chemicals/ starch to give strength to yarn)
• Loom Shed: It consists of looms, which determine capacity of any weaving unit.
Looms convert yarn into grey cloth/ fabric. Two types of yarn are fed into the
loom (called warp yarn and weft yarn). The process of conversion into fabric
mainly involves a shedding mechanism and a weft insertion mechanism.
Capacity of weaving unit can be indicated in terms of number of looms of
certain width and type. Most common types of looms are:
o Air Jet looms (having highest speed)

o Projectile looms
o Rapier looms
• Folding: The process involves inspection of the grey fabric and its grading
according to quality. After inspection the fabric is packed.
• Specification of any woven fabric is indicated in terms of the following:
o Warp yarn per inch
o Weft yarn per inch
o Count of warp yarn
o Count of weft yarn
o Width of fabric
Knitting: Knitting is an alternate process of weaving. Yarn is converted into the

fabric either through the process of weaving or knitting.
In knitting process single yarn entangles on knitting machines to form fabric. The
knitting process does not involve the warping and sizing stages as discussed above
in weaving. Capacity of knitting unit can be indicated in terms of the number of its
knitting machines of certain diameter and type.
More than the technical difference in knitting and weaving process, the difference
in end use of the product is significant. Knitted fabric is used to produce garments
like T-shirts, socks, track suits, west, etc whereas woven fabric is used to make
made-ups like bed sheets, quilt covers, curtains, dress shirts etc.
As knitted garments require more customized requirements from foreign buyers,

quality control requirements are consequently high. Most of foreign buyers of
knitwear products are leading brands, which emphasizes high quality
requirements.
538
Processing / Finishing: The process refers to converting fabric into finished/ end
product. This follows the knitting or weaving process. It generally involves the
following main steps:
• Singing and De-sizing: Singing is the process of removing hanging threads from
the fabric surface. De-sizing is the process of removing starch which was
employed on the fabric during weaving. Singing and de-sizing process is carried
out only for woven fabric and not for knitted fabric.
• Bleaching: It is meant to reproduce natural white color of fabric by removing

impurities. The process is applied both on woven and knitted fabrics.
• Mercerizing: It is meant to increase absorption qualities of fabric so that it

absorbs dyes quickly. The process is applied on both woven and knitted fabrics.
• Dying and Printing: It is the process of imparting color to fabric (both woven and
knitted). It is the process which determines production capacity of finishing
unit. Production capacity would be broadly related to the number of machines
used in this process and would be indicted in terms of meters of fabric dyed/
printed per day.
Dying process is usually carried out on the following machines:
o Jigger or winches machine for batch wise dyeing of woven/ knitted fabric.
o Pat Thermosol or Pat Steam machines for continuous dying of woven/

knitted fabric.
Printing process is usually carried out on the following machines:
o Rotary printing machine for woven fabric.

o Table printing machine for knitted fabric.
• Stenter: It is the process which adjusts width of the dyed/ printed fabric and
gives the fabric its final finish. Final finish is given by employing special features
like softness, water repellent qualities etc. The process is only relevant for
woven fabric.
• Cutting, Stitching and Packing: The dyed / printed fabric is cut, stitched and
packed in accordance with the required specifications.
Textile mills require working capital financing for various reasons as mentioned
below:
• In case of spinning mill, finance is required for procurement of Ginned/ Lint

Cotton, its processing, and to finance yarn awaiting sale and till receipt of sales
proceeds thereof.
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To facilitate self-liquidation of Bank’s exposure, it is prudent that financing to

support storage of finished product (yarn) is kept at minimum and major
portion of working capital limits is advanced against lint/ ginned cotton.
• In case of weaving mill, finance is mainly required for procurement of yarn,

sizing material/ chemicals, and packing material. Finance may also be required
to finance inventory of cloth/fabric. It is prudent that financing to support
storage of finished product (cloth/ fabric) is kept at minimum.
• In case of Finishing/ processing mill, finance is mainly required for

procurement of fabric and dyes.
• Composite units mainly require finance for purchase of cotton, as subsequent

processes are done in-house. However, the conversion and holding costs of
various types of inventories may be substantial, which also require financing.
As a principal, risk involved in financing against cotton is lesser as compared to

financing against yarn, fabric, or end products. As we move from yarn to fabric and
to end product, the risk increases as it is difficult to accurately price these items
and secondary market is not as liquid as in case of cotton (cotton is traded daily on
Karachi Cotton Exchange). Therefore, finance against yarn, fabric, and end
products should be kept at minimum.
Similarly, finance against knitwear should be discouraged as far as possible, as

pricing of knitwear garments / fabric is very complex. Extreme prudence must be
carried out in evaluating credit worthiness of a knitwear client and effort should be
made to secure finance against realizable assets not part of the knitting business
e.g. realizable residential property etc.
Cash Finance - Cotton
• Transaction Sequence
o The customer purchases cotton from the ginners or from the market;
o The cotton is secured by the Bank’s Muccadum in a godown, generally

located in the customer’s premises in the care and custody of Muccadum(s).
o When the Muccadum confirms that the cotton bales have been received and
secured, the Bank advances CF limit to Customer;
o When the obligor wishes to use the pledged cotton, it repays the Bank, who
then issues a Delivery Order (DO) to the customer, for presenting it to the
Muccadum for release of the bales. Weight note should also be obtained at
the time of allowing draw down, which shall be considered for calculation of
draw down amount.
o For shipment to seaport for exports, delivery against transit limit may be
allowed for transportation on truck / rail, under supervision of Bank
approved C&F agent / Muccadum.
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• Major Risks
o Price Risk
Price of cotton keeps on changing with change in demand and supply
condition during any season. Therefore changes in the price of cotton may
reduce the coverage on the Bank’s loan. Such risk is mitigated through
periodic monitoring of margin available and periodic monitoring of cotton
prices.
o Liquidity Risk
There is risk that obligor may fail to liquidate Bank’s exposure against cotton.
A ready national market for cotton, including active daily trading on the
Karachi Cotton Exchange, mitigates Liquidity Risk. There is also a very liquid
secondary market, ensuring ready disposal of any cotton stocks, should the
need arise.
• Structuring of Cash Finance - Cotton
o Last year’s limit and its utilization record are reviewed (where applicable) and
requirement is assessed for the mill on the basis of quality of plant/machinery,
its production capacity and marketability of the product.
o An estimate of cotton consumption by mill is worked out prior to each

season. This is based on the per spindle consumption of 8 oz., 10 oz. and 12
oz. per spindle per shift (3 shifts per day). Such consumption varies
according to the count of the yarn produced and plant operation efficiency.
Actual number of spindles in operation should also be kept in view. The
formula for estimating lint cotton financing requirement of a textile mill
along-with illustration appear in Appendix II to Chapter 6.4.
o For old textile mills, this may be estimated on the basis of last 2-3 years
actual consumption, so as to ensure that Bank’s finances are not used for
speculative stocks build-up.
o Based on above basis C.F. (Cotton) limit should be estimated. Where

customer requests R.F. limits as well, then sum of C.F. and R.F. should not
exceed total cotton financing requirement.
In case of individual weaving, knitting, or finishing units, where cotton is not the
raw material, the client may request CF limit only against yarn or fabric. Such
customers should be evaluated on case to case basis by exercising extra prudence
in terms of credit evaluation. In such cases, where cotton is not part of prime
security, effort should be made to adequately secure finance against realizable
collateral (not part of the business assets) e.g. realizable residential property etc.
Calculation of procurement/ consumption requirement for weaving and

processing/ finishing units is relatively more complex as compared to spinning, as
it involves large number of variables.
However, working capital requirements of weaving and finishing units can be

broadly assessed by analyzing the break-up of its past year purchases, as disclosed
541
in audited financial statements. While analyzing a weaving unit, the value of its
purchases of yarn and sizing material would broadly constitute its main
procurement requirements.
These may be analyzed against the customers’ borrowings from all banks after
keeping a prudent margin percentage. Similarly, for finishing/ processing unit, the
value of its purchases of fabric and dyes would broadly constitute its main
procurement requirements. These may be analyzed against the customers’
borrowings from all banks after keeping a prudent margin percentage.
Running Finance
Running Finance facility is to be allowed up to a maximum of 15% of CF limit for

reputable customers if requested. The percentage will vary from 5% to 15%
depending on the credit worthiness of the client. This facility is secured with
exclusive / first pari passu hypothecation charge on current assets. However, for
the purpose of security evaluation, only cotton stocks other than the pledged stock
will be taken into account.
However, in exceptional cases hypothecation based exposure can be allowed to the

extent of 25 % of the approved CF line as an independent line subject to following
conditions:
next season.
Finance against Yarn, Fabric / Cloth and Work-in-Process

Finance against Yarn, Fabric/ Cloth, and Work in Process should be discouraged
as far as possible. This if need be:
• In case of spinning unit, finance against yarn and work in progress should be
limited to 10% of outstanding within CF – cotton limit @ 25% minimum margin
(on a case to case basis).
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• In case of integrated units the facility against yarn and/or cloth should not
exceed 20% of total outstanding against CF- cotton limit @ 25% minimum
margin.
• The DD/TT for goods in transit up to 10% of CF limit may be allowed to credit
worthy customers, subject to close monitoring inclusive of T.R. for a period not
exceeding 30 days, the same should not exceed 10% of outstanding against C.F.
limit. The T.R. facility should be backed by collateral and to be considered for
good clients only, to facilitate them in export of goods under the supervision of
Bank’s approved C&F Agent.
Other Facilities
• FAFB/FBP facility against discrepant documents (acceptable to bank) up to

20% of FAFB/FP limits may be allowed as a regular limit at the time of
sanctioning of facility, on case to case basis.
• Foreign Currency Bill Discounting (FCBD) to be allowed up to 50% of

FAFB/FBP limit, on case to case basis.
Margin
• Pledged Cotton Stocks ……… Minimum 10%.
• Pledged Yarn / Cloth ……… Minimum 25%.
• Hypothecation of Finished Stocks / Stocks in Process / Receivables ………

Minimum 25%.
Monitoring
• Renewal of all Working Capital limit shall be subject to complete adjustment

and payment of up to date mark-up / installments / dues.
• No financing shall be allowed to mills who themselves or their allied concerns or

their directors / owners are defaulters of MCB or any other Bank / Financial
Institution or have been allowed write-off waiver in the past or gone into
liquidation, during the last 10 years.

• The Bank selects and posts a Muccadum from the list of approved Muccadums,
who takes pledged cotton stocks in their custody;
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• The Muccadum provides the Bank with a weekly stock report and on each
receipt and delivery, specifies the movement of cotton, confirming the number /
quantity of bales / other stocks in its custody;
• The branch reconciles the stock report with the Bank’s records;
• Cotton/ yarn/ fabric pledged & hypothecated should be insured against all
pertinent risks including riot, fire and damage (RFD).
• CF-Cotton:
o Drawdown / disbursements against CF - cotton limits only to be allowed

between October and April.
o Repayment schedule for CF Cotton Limits (only); Cleanup should be

achieved as a percentage of approved limit unless otherwise restricted by
SBP, internal circulars or specifically mentioned in approval of finance.
July 20 %
August 50 %
September 100 %
o A further relaxation can be allowed by the Business Group Heads to the

extent of 30 days, subject to the following conditions:
No drawdown will be allowed against fresh cotton crop.
Clean up period of at least seven days to be observed before allowing

drawdown against fresh season crop.
If clean-up against CF-Cotton limit is not achieved even after expiry of

the 30-day extension period, the account shall be watchlisted and lines
frozen.
o The above reduction will apply to CF and FAPC but will not be applicable to
FAFB and FBP.
Note: For Imported Cotton draw down can be allowed round the year provided
the same is imported through MCB only, however each tranche is to be adjusted
within a maximum period of 180 days.
• CF (Other than Cotton):
o Where CF is secured against stock other than cotton, financing period of

each tranche must not exceed 90 days.
o Drawdown for CF limits secured against stock other than cotton may be
allowed throughout the year.
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Financing Price for Cotton

Normally financing shall be allowed at base grade with a minimum of 10% margin.
Financing at above base grade price / drawing power may be allowed only in case
of reputable textile mill / exporters with permission of G.M. only on being satisfied
that lint cotton pledged is of better grade and staple length etc. (Laboratory report
from the Textile mill or from an independent laboratory and export quality record of
the mill may be of assistance).
Where a margin higher than 10% is stipulated in Approval of Finance, the Drawing
Power is to be adjusted accordingly.
Financing price for Imported Cotton to be based on its landed cost or at Base grade
local cotton rate, whichever is lower. These are conveyed through CRCD circulars
from time. In case higher than base quality rate is requested the same shall require
prior permission of G.M. to reputable mills only, who shall entertain such request
after ascertaining from lab report / packing list / invoice, the nearest local grade
with which the same may be bracketed.
General Managers / Regional Managers / Branch Managers are required to keep a

close watch over prices so as to ensure adjustment in drawing power due to fall in
the KCA quoted rates / BMP. If invoice / local price is less than BMP advised, the
required margin on the same shall be applicable for determining the Drawing
Powers. In case of any increase in the advised Bench Mark Price, the valuation of
stocks already held shall not be revised upwards.
• The Drawing Power is to be determined on weekly basis.

outstanding or obtaining additional bales as per the calculated shortfall. On the
eighth day, limits are to be restricted according to the Drawing Power and
approval to be taken for the excess thus created.
• Each month and upon each receipt / delivery, Stock reports should be obtained
from the Muccadum and tallied with the Pledge Register.
Insurance
Appropriate insurance policy must be obtained for stocks under pledge, open
pledge, or hypothecation. Where goods are stored in open, the policy / policy cover
note should clearly mention that the insured stocks / assets are stored in open and
there should be no restrictive clause regarding such storage arrangement to avoid
any dispute in the event of any claim.
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6.5 Government of Pakistan

Commodity Finance - Wheat
6.5.1 Concept
6.5.2 Operating Procedure
6.5.3 Mark-up Rate
6.5.4 Accounting Procedure
6.5.5 Documentation
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6.5.1 Concept
Under this product, the customer is the Government of Pakistan or its agencies
that require the Bank to make payments to farmers for procurement of wheat /
food items on their behalf. The purpose of the facility is to provide working capital
to farmers to finance their following season’s / year’s crop. The duration of this
facility is one year.
6.5.2 Operating Procedure
The following procedure shall be followed for financing Government Commodity

Operations:
• The Bank shall purchase commodities from farmers and sell them on deferred
payment for 365 days to Government or its agencies on the marked-up price.
• When wheat procurement season starts, the Bank receives a list of wheat
procurement centers from State Bank of Pakistan.
• On receiving the list of centers from State Bank of Pakistan (SBP), the Bank
shall accordingly advise its designated branches to start making payments to
wheat sellers.
• At the start of each quarter, limit of finance facility to be granted is also fixed by
the SBP.
• As per procedure, Branches make the payment to wheat sellers on the posted
scrolls at the centers, which are prepared and signed by the Centre In charge,
Food Department and Provincial Government.
• Mark-up and Commission are charged on the finance on quarterly basis.
• Commission is credited to the concerned Branches.
• Payment to wheat sellers is made by crediting the purchase price into their
accounts maintained at the Bank’s Branches.
• Having made payment to wheat sellers, the Branches send the scrolls to
designated Branches for reimbursement.
• At the designated branch, the scrolls are checked properly and then
reimbursement is made to branches every week / twice a week by debiting the
account of “Provincial Government / Government Agency”.
• Guarantee for the above financing is provided by the Federal Government.
• Loan agreements invariably include a clause by which the Bank is vested with
the power to recall the advance(s) / credit facilities at any time if the same are
utilized for hoarding or purposes detrimental to the public interest.
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• An undertaking to the above effect should invariably be obtained in writing

against each finance to ensure compliance of the aforesaid regulatory
requirement.
• The branches designated for Government Commodity Operations Financing

should ensure that they hold a photocopy of the latest Government Guarantee
or should refer to CRRS or CRMD if the same is not held.
• The branch / controlling office in the field should request the concerned
department to provide the godown-wise break-up of stocks, signed by the
authorized persons of the concerned agencies, to ensure that as and when
stocks fall short of the outstanding facility, a letter is be written to the borrower
to make up for the shortfall.
• The value of hypothecated stocks and receivables constitute the primary

security whereas the government guarantee constitutes only the secondary
security. Therefore, steps should be taken immediately to reduce the
outstanding borrowing amount to the value of the available stock and
receivables. Furthermore, the Branches shall ensure that the value of
hypothecated stock and receivables must cover the value of the advances made
to the agencies. They should also refuse to grant the agencies mentioned above
any further accommodation in accordance with the usual banking practice.
• Up-to-date monthly stock and receivables report should be available in the

designated branch office. For further details, refer Circular no. CMD/GM-CL/43
dated November 17, 1999.
• No margin or insurance cover is provided by Government Agencies on stocks

held against Government commodity financing operations.
6.5.3 Mark-up Rate

The prescribed rate of Mark-up (TPMR), as approved and charged only on the
principal on quarterly basis, will be kept separately in the mark up A/C. Bank will
not, under any circumstances, charge mark-up on markup.. Standard Mark-up
Rate (SMR) in case of Government Commodity financing operations shall be the
Bank's Normal Mark-up Rate for general advances or as per terms of approval.
In addition to the mark-up, the Bank may continue to charge a commission of

3/8% on disbursements in respect of procurement operations, which is to be
recovered from the agency by the designated branch and transferred to the
concerned disbursing branches.
6.5.4 Accounting Procedure

For accounting purposes, the Bank will maintain two separate accounts for
commodity operation financing - one for Principal and the other for mark up:
• The Bank will calculate and recover mark up, at TPMR, from the Government /
Agencies / Corporation on quarterly basis.
• As commodity finance limits are allocated on quarterly basis, the approved
TPMR will be applicable on the outstanding finance against Government /
Agencies / Corporation during each quarter.
548
• The Bank will calculate and communicate the amount of mark up to

Government / Agencies / Corporation within a period of seven (7) days from the
end of each quarter and, thereafter, the latter will be required to pay the mark-
up within fourteen days. Thus, the Government / Agencies / Corporations will
have 21 (twenty one) days in all at their disposal from the end of each quarter
for making payment of mark up to the Bank.
• In case of timely repayment within the stipulated period, the liability on mark-
up for the last quarter will stand relinquished. However, where the
Governments / Agencies / Corporations do not make payment of mark up
within the allowed 21 days (grace period), the Bank will charge normal lending
mark-up rate (or as per terms of approval) on the outstanding finance on which
markup has not been paid by the Government / Agencies / Corporations,
beginning from the first day of the subsequent quarter up till the date the mark
up is paid.
• In light of SBP letter # BSD(RU-50)/14842/911/1001 dated 17th October 2001,

circulated to All GMs / Credit Executives of concerned branches, the following
must also be adhered to:
o During the Procurement / Retention period (May to September) of wheat

stocks, the branch shall continue to charge mark-up at the approved TPMR
in case of Government Wheat Procurement Financing. The grace period for
Mark-up of April to June quarter shall stand extended up to 21 days after
Retention period.
o The demand letter for Mark-up falling due during the Retention period may
not be raised up to September 30. Thereafter, demand for Mark-up due for
“April to June quarter and July to September quarter” may be raised within
7 days of September quarter end, allowing a grace period of 21 days
reckoned from “Retention period / September” end.
o In case Mark-up is not cleared by the above extended grace period, Normal /
Standard Mark-up Rate (SMR) shall apply from the first day of quarter
starting after retention period (i.e. October 01).
o The aforesaid relaxation in grace period shall not apply to any Mark-up due
prior to start of the Retention period, i.e. for Principal Amount on which
Mark-up is due and unpaid within usual grace period of 21 days at the end
of January – March quarter or earlier.
6.5.5 Documentation
• Agriculture Finance Agreement (IB-4).
• Letter of Hypothecation (IB-25A).
• Photo-copy of Government Guarantee [original is held at CRRS, P.O.].
• Authorization to negotiate Promissory Note / Bills to SBP in case of need
(Annexure–III)
• Promissory Note (IB-12).
• Stock Report.
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6.6 Financing against Cash/

Near Cash Collateral
6.6.1 Concept
6.6.2 Special Precautions
6.6.3 Application / Policies
6.6.4 Marked-up Price and Adjustments
6.6.5 Documentation
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6.6.1 Concept
Financing facilities (fund based and/or non-fund based) may be allowed against
cash/near cash collateral. List of cash/near cash collateral is available at Section
5.1.17 or as amended through CRMD Circulars from time to time. Financing
facilities against cash collateral shall be provided for business purposes only.
6.6.2 Special Precautions
In addition to precautions mentioned in Section 5.1.17, Branch/CRC should

ensure pledge over the securities before releasing the funds to the customer by
ensuring that the following conditions are met:
o Lien to be marked on securities offered.
o Confirmation to the effect should be obtained from the security issuing

agency, where possible e.g. in case of DSCs / RICs / SSCs, confirmation
should be obtained from the concerned authorities.
o Letter of encashment to be obtained from the owner of securities to encash

the securities, if borrower fails to make the payment.
o Documentation to be completed as per the standard requirements.
• The margin on value of security should be regularly monitored and mark-up

due should be recovered promptly.
• It should also be noted that the credit facility is not available in the name or
against deposit receipts or certificates of Minors or Non-Profit Organizations
(unless their By-Laws / Trust Deed permits them to do so) or Partnership
concerns (unless the name of partnership appear on the deposit receipts or
certificates and no partner is minor).
• Bahbood Savings Certificates cannot be pledged as security.
• For financing against FCY deposits, valuation of the same to be done in

accordance with CRMD Circulars at the time of initiation of finance and
revaluation of the same to be done on monthly basis. In case of any shortfall
the same must be adjusted / topped-up within three working days.
• The certificates under pledge shall remain in safe custody of Branch/CRC till
full repayment of the principal and mark-up.
• The certificates issued under National Savings Schemes (i.e. DSCs, SSCs, RICs)
shall be allowed for pledge for the purpose of financing after expiry of six
months from the date of issuance of the certificates purchased through fresh
investment. This condition shall not apply in respect of the certificates
purchased through reinvestment.
• Third party deposit:
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Letter must be sent by the branch to the third party, confirming that their
deposit has been placed under Bank's lien against financing to the customer.
If the third party is a limited company / non-profit organization, verification

should be conducted to ensure that their memorandum of by-laws for trust
deed permits them to do so. Any such regulatory requirement must be adhered
to.
• Any condition / restrictions imposed by Central Directorate of National Savings

/ SBP / any other regulatory body shall supersede the existing conditions and
should be meticulously followed.
6.6.3 Application / Policies
• Appendix I to Chapter 6.6 (Credit Proposal cum Approval of finance) shall be

used as proposal and approval of finance.
• Demand Finance / Running Finance may be provided for tenor not exceeding
twelve (12) months. Time to time adjustment is not necessary. Financing up to
3 years (Demand Finance only) may be approved subject to the condition that
customer undertakes to apply for the continuation of the limit every 12 months.
Documentation and requisite IB Forms in such cases shall be for limit amount
plus three years Standard Mark-up Rate (SMR).
• The minimum margin requirement is 5% of the encashment value [excluding

Zakat and withholding tax, if any] of Deposit Receipts / Certificates on the date
when finance is being availed / renewed.
6.6.4 Marked-up Price and Adjustments
The calculation of mark-up for mark-up agreement purposes shall be based on

SMR.
6.6.5 Documentation
• Documentation as per Appendix IV to Chapter 5.1
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6.7 Financing Against Shares

6.7.1 Introduction
6.7.2 Concept
6.7.3 Financing against Shares

(existing/conventional financing)
6.7.3.1 Risk Management Considerations

6.7.3.2 Special Precautions/Guidelines for
Financing against Shares
6.7.3.3 Monitoring Market Value of
Shares
6.7.3.4 Top-Up and Sell–Off of Shares
6.7.3.5 Guidelines for Selling Shares
6.7.4 Margin Financing
6.7.4.1 Comparison between Margin

Financing & Finance Against
Shares
6.7.4.2 Conditions for extending Margin
Financing to Brokers
6.7.5 Compliance with - SBP PR (R-6)

(Regulation In Respect of Financing against
Shares)
6.7.6 Shares Eligible for Financing
6.7.7 Documentation
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6.7.1 Introduction
This chapter provides guidelines and regulatory requirements regarding Financing

against Shares. This includes (a) Guidelines and regulatory requirements regarding
financing against shares (Existing/Conventional financing); and (b) Guidelines and
regulatory requirements regarding Margin Financing
6.7.2 Concept
Financing (both fund and non-fund based) secured by shares requires certain risk
management considerations due to the nature of the security.
Financing against shares can be categorized / divided into two parts:
• Finance Against Shares (existing / conventional financing)
• Margin Financing
6.7.3 Finance Against Shares (existing / conventional financing)
6.7.3.1 Risk Management Considerations
Shares are riskier than debt as they have a residual interest in the company.
Therefore, upon liquidation/winding up, they will get repaid after all other claims
against the company have been settled.
1. There are various levels of liquidity of shares. Firstly, shares that are regularly
traded on the Stock Exchange are most liquid. Secondly, shares that are listed
but not actively traded on the Stock Exchange are less liquid. Lastly, shares
that are not listed on the Stock Exchange are the least liquid.
2. The State Bank of Pakistan does not allow financing on the security of unlisted
shares.
3. The Prudential Regulations allow financing against shares that are lodged with
the Central Depository System (CDS). Under this system, the physical share
certificates are replaced with residual holdings. The CDS offers a more secure
and efficient system than the previous physical share system for settlement and
pledge of shares.
4. The market price of shares listed on the Stock Exchanges fluctuates
considerably, which requires adequate margin.
5. The price of non-actively traded stocks may not reflect the inherent value of the
shares.
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6.7.3.2 Special Precautions/Guidelines for Financing against Shares
1. Complete adherence to SBP Prudential regulations and other regulatory

requirements vis-à-vis financing against shares to be ensured.
2. Finance against shares shall be allowed at Stock Exchange Branches only
except where special permission is granted by Head RMG.
3. Financial statements complying with Prudential Regulations and eCIB report
(where applicable) shall be obtained prior to allowing finance.
4. Financing against shares below par value will not be allowed. However, in
exceptional cases, CRMD may issue necessary circular / instructions for
accepting any below par share as security.
5. Branch must hold authority from the borrower to sell the shares held as
security, without reference to borrower in case margin reduces to 10% at any
time or 75% of the required margin due to market fluctuations. This shall be
invoked without any delay subject to prior permission from G.M.
6. The Bank reserves the right to increase margin at its discretion, while taking
into account prevailing market conditions or regulatory requirement.
7. Bank, at its own discretion, may not accept shares of any company or may not
accept replacement of shares with the shares of another company.
8. Shares accepted as security should be in marketable lots.
9. Exposure against any single scrip should not exceed one third (33.33%) of the
approved limit of the customer.
10. As per Bank’s policy, securities owned by minors shall not be accepted for
financing.
11. In case shares are owned by a company, a Board Resolution of the company is
required which authorizes specified person(s) to pledge the company’s assets
with banks.
12. In case the shares are owned by a company, its Memorandum and Article of
Association should be checked for powers vested in the company to secure the
debts of a third party.
13. It should be ensured that the disbursements against approved facilities/ limits
are made only after the collateral shares have been pledged with the bank. Any
exceptions should be duly identified and approved by the competent
authorities.
14. It must be ensured that beneficiary of the finance must be the absolute owner
of the shares so pledged or has the necessary mandate to pledge the shares as
security for availing financing facility from the bank.
6.7.3.3 Monitoring Market Value of Shares
Where the Bank holds shares as security, it is necessary to monitor the market
value of these shares. It should be ensured that Drawing Power is calculated on a
daily basis. A detailed share evaluation report (Margin Call Report) should be
generated by the branch for the shares held under its lien. The report must clearly
555
specify the borrower’s name, outstanding loan / facility amount, market value of
collateralized shares, margin requirement, and the shortfall / excess amount based
on the margin requirement.
1. In case of any shortfall in the market value of shares against financing

obtained, the concerned Branch Manager should briefly state the remedial
strategy and sign-off against the name(s).The report should then be sent to
respective Regional Manager / General Manager.
2. A letter should be sent to the clients whose accounts are subject to
shortfalls. The client will be asked to either reduce the outstanding or bring in
additional collateral to bring the outstanding within the agreed margin
requirement or else bank may revoke the authority to sell.
6.7.3.4 Top-Up and Sell–Off of Shares
In case the market value of the pledged shares falls below our margin requirement,
the customer must deposit additional shares (acceptable to the bank) within 3 days
of receiving a letter for the same. However, if the margin available is less than 10%
and the customer fails to provide additional shares after receiving letter from the
bank, the shares can be sold as per guidelines for selling shares given below.
6.7.3.5 Guidelines for Selling Shares
The guidelines for the sale of shares being liquidated to adjust finances against
which these shares are secured / collateralized are as follows:
1. The Branch Manager (BM) sends notices to the obligor and to any third party
pledges for the sale of shares.
2. BM gets written quotes from various brokers (three written quotes are needed).
3. A selling broker is selected based on price quote and other terms and
conditions. If there are any compelling reasons for not accepting the highest
quote, they must be mentioned.
4. The BM forwards shares sales memo to Regional Manager, who seeks
permission from General Manager on a sale of shares Memo.
5. All transactions are on delivery against payment basis (draft or SBP cheques).
6.7.4 Margin Financing
In order to avoid speculative trading involved in bald, SECP in 2004 decide to

replace badla with Margin Financing. Margin Financing means lending by banks /
DFIs to Brokers for their clients to purchase approved shares of joint stock
companies listed on the Exchange with the retention of at least minimum margins
prescribed by the State Bank of Pakistan.
556
a) Margin financing allows investors to buy securities by borrowing a portion of

the purchase price.
b) The buyer (broker’s client) pays a portion of the purchase price and the broker
lends the difference by borrowing from the bank against the purchased
securities & margin deposited in the Broker Client Margin Account.
c) The buyer in turn pays interest on the broker’s loan.
6.7.4.1 Comparison between Margin Financing & Finance Against Shares
Key Deciding Features Margin Finance Finance Against Shares

To facilitate borrower
To facilitate the investor
(broker / investor) by
Purpose in purchasing the
unlocking their tied up
approved shares
investment in shares
New (as well as exiting)
but the ownership is of
Share offered as investor, pledged by the
Existing Shares
security investor’s broker
mentioning the sub-
account
Investor (but for the bank
Ultimate borrower Investor / Broker
it is broker)
6.7.4.2 Conditions for extending Margin Financing to Brokers
Following are the guidelines provided by SBP regarding Margin Financing
1. Banks/DFIs are advised to encourage the brokers who are availing margin
financing facilities from them to obtain credit rating from a credit rating agency
on the approved panel of State Bank of Pakistan. State Bank is not making
credit rating mandatory or prescribing any minimum credit rating for the
eligibility purposes. The purpose is to emphasize the importance of credit rating
and encourage the brokers to provide this important information to the lending
bank/DFI for their decision-making.
2. The margin financing shall be provided by banks/DFIs only against approved
securities provided that the approved shares should be in dematerialized form
in the Central Depository.
3. The brokers availing the margin financing from banks/DFIs would be
prohibited from lending the funds obtained from banks/DFIs or their own
funds, directly or indirectly, to lending bank’s/DFI’s connected entities,
directors or major shareholders and relatives of directors or major shareholders.
4. Margin Financing shall be provided by banks/DFIs from designated branches
only.
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6.7.5 Compliance with - SBP PR (R-6) (Regulation In Respect of Financing

against Shares)
In light of SBP prudential regulation R-6 (1 (B)-2), banks are not allowed to hold
shares in any company (as pledgee, mortgagee or absolute owner) of an amount
exceeding 30% of the paid-up share capital of that company or 30% of Bank’s own
share capital and reserves, whichever is less (should be treated as ceiling).
The computation of exposure to determine compliance with PR (R-6) is illustrated

by the following examples:
Illustration 1:
Calculation of 30% of a Company’s Paid-Up Capital Rs.
Paid-Up Share Capital of ABC Co. Ltd. 400,000,000

(No. of Issued Share x Face value)
30% of Paid-Up Share Capital of APL 120,000,000
Calculation of 30% of a MCB’s Share Capital &

Reserves Whichever is lower
will be the ceiling
MCB’s Share Capital & Reserves 30,125,702,000
30% of MCB’s Share Capital & Reserves 9,037,710,600
Since 30% of ABC Co’s paid-up share capital is less than 30% of MCB’s share
capital and reserves, therefore 30% of ABC Co’s paid-up share capital would be
treated as ceiling i. e Rs. 120,000,000.
Say, MCB’s holding of ABC Co.’s shares is 1,111,000 shares
MCB’s holding 1,111,000 x 10 = Rs. 11,110,000

(No. of Shares held x Face Value)
Breach Ratio- 30% Holding Ratio = MCB’s Holding/Paid up Capital

11,110,000 / 120,000,000 =
9.23 %
(NO BREACH)
As per R-6 (1. (A) f) banks shall not take exposure on any one person (whether
singly or together with other family members or companies owned and controlled
by him or his family members) against shares of any commercial bank / DFI in
excess of 5% of paid-up capital of the share issuing bank / DFI.
558
Illustration 2:
Client Name: XYZ Securities Pvt. Ltd.
Share Pledged: National Bank of Pakistan
Paid-Up Capital of NBP: Rs. 7,090,712,000

(No. of Issued Share x Face value)
5% of Paid-Up Capital of NBP (Ceiling): Rs. 354,535,600
Say, MCB’s exposure on XYZ Securities Ltd. Rs. 747,536,000

against shares of NBP:
Breach Ratio: 5%
Holding Ratio: 747,536,000 / 7,090,,712,000

MCB’s Exposure / Paid-Up Capital = 10.54%
(BREACH)
For the purpose of monitoring of above mentioned regulations, the following

procedure shall be followed:
Monitoring of R-6 [Section 1 B (2)]
MRMD shall carry out the monitoring exercise of Prudential Regulation R-6
[Section 1 B (2)]. Holding position shall be obtained from CRC and Capital
Markets. FCD shall communicate holding position only in the event of a change
in its holding position.
MRMD shall ‘Red Flag’ such cases where the Bank holds shares of companies,
close to the limit19 defined as per Prudential Regulation R-6[Section 1 B (2)].
Prior approval from MRMD shall be obtained before any financing is allowed or
acquiring any shares;
1. Where MCB’s holding (as pledgee, mortgagee or absolute owner) of shares
of any company is 25% of the paid-up share capital of that company or
25% of Bank’s own share capital and reserves, whichever is lower.
Monitoring of R-6 Section 1 A (f)
CRMD shall issue periodic circulars mentioning the maximum exposure allowed
(5% of paid-up capital of the share issuing bank / DFI) to a client against
shares of commercial banks / DFIs.
19
Where MCB’s holding (as pledgee, mortgagee or absolute owner) of shares of any
company is 25% of the paid-up share capital of that company or 25% of Bank’s
own share capital and reserves, whichever is less.
559
CRC shall be responsible for monitoring of maximum exposure allowed to a

client against shares of commercial banks / DFIs as circulated by CRMD.
CRMD shall highlight cases on monthly basis where breach has occurred.
6.7.6 Shares Eligible for Financing

A separate frame work has been developed in order to update the list of shares
eligible for financing. This framework shall take into consideration Volatility in
Share Prices, Average daily turnover and qualitative judgment at the time of
updating the list. Keeping in view all these factors, different shares against which
financing can be allowed are classified into three categories as A, B & C with
margin requirements as follows:
Category Margin Requirement
A 30 %
B 40 %
C 50 %
Circular of eligible shares classified into these three categories will be issued on
half yearly basis or as per directives from MCC. However, the frequency of the same
can be increased or reduced keeping in view the market position.
Where a higher margin requirement has been stipulated in the sanction advice, the
same shall apply. Financing against shares below par value would not be allowed.
Procedure for Exceptions
Group Head CBBG and Group Head WBG may propose exceptions (addition /
deletion to the list or change of category) to the list of shares eligible for financing
along with due justifications on case to case basis. Justifications must include
(among other factors) an analysis of volatility in price and turnover of the share
proposed for exception.
Such proposals shall be forwarded by Group Heads to Credit Risk Management

Division (CRMD). Keeping in view the justifications, Group Head RMG will be the
approval authority for these exception requests.
6.7.7 Documentation
• Documentation as per Appendix IV to Chapter 5.1
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6.8 Financing to Financial

Institutions
6.8.1 Introduction
6.8.2 Call Lending
6.8.3 Certificates of Investment / Certificates of

Deposit Placement
6.8.4 Reverse Repo Lending
6.8.5 Term Finance Certificates
6.8.6 Trade Finance / Bank Guarantee Lines
6.8.7 Rupee Drawing Arrangements
6.8.8 Foreign Exchange and Derivative

Exposures
6.8.9 Limit Setting
6.8.10 Limit Monitoring
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6.8.1 Introduction
The purpose of this chapter is to provide procedural framework for financing

facilities offered by MCB to financial institutions. These facilities may be classified
into fund based facilities and the non-fund based facilities.
Fund based facilities are the conventional credit facilities like call lending, clean
placements, investment in certificates of investment (COIs) or certificate of deposits
(CODs), reverse repo lending, investment in TFCs etc. Treasury & FX Group is
actively involved in extending credit facilities to financial institutions. Except
investment in TFCs all other credit facilities mentioned above are short term in
nature and are called money market activities. Besides these activities, the bank
also extends running finance and term finance facilities to non-bank financial
institutions.
Non Fund based facilities are generally extended to financial institutions for trade
finance and bank guarantee business. These facilities are covered under TF/BG
exposure limits extended to a financial institution. These exposure limits are
managed by FIID.
The bank is also involved in FX and derivatives trading. While dealing with its
counterparts MCB assume credit exposure. To manage these exposures, the bank
assigns exposure limits like spot/settlement limits, forward limits and limits for
derivative transactions.
The description of these products is given in PPMs and the treasury operational
manual jointly developed by Treasury & FX group and the Treasury Operations
(TROPS). However, a brief product wise description is narrated below.
6.8.2 Call Lending
Call lending is basically clean lending to meet short term requirements of financial
institutions. Treasury & FX Group is authorized to invest in Call Lending.
Operations Group is responsible for deal confirmations, book keeping, settlement

and reconciliations. FIPS & MRMD is responsible for Call Lending limits
monitoring.
6.8.3 Certificates of Investment (COI) / Certificates of Deposits (COD)

Placement
These are short term instruments and MCB invests in COIs / CODs up to a
maximum tenor of six months. Treasury & FX Group is authorized to invest in
these instruments.
Operations Group is responsible for deal confirmations, book keeping settlement

and reconciliations. Safe Custody of COIs is the responsibility of Treasury
Operations (Operations Group). FIPS & MRMD is responsible for Call Lending
limits monitoring.
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6.8.4 Reverse Repo Lending
Reverse Repo is basically lending secured by financial instruments .Treasury & FX

Group is authorized to deal in Rev Repo Lending collateralized by TBills, PIBs, TFCs
and Corporate Bonds. Separate credit approvals are required for accepting
corporate bonds / TFCs as collateral. Haircuts should be applied where applicable
in line with regulatory guidelines or credit requirements.
Following procedure will be followed for approval of Rev Repo limits against
TCF/Corporate Bonds.
Treasury will recommend list of TFC / Corporate Bonds and exposure limits
against each to FIID.
1. FIID shall recommend exposure limits to FIPS & MRMD as per existing
procedure for FI limits.
2. FIPS-MRMD shall perform quantitative analysis (based on VaR, volume and
credit rating), to determine the acceptability of TFC / Corporate Bonds plus
haircuts / margins to be applied.
3. Rev Repo exposure Limits against each TFC / Corporate Bonds shall be
considered as exposure against the Rev Repo counter party and the TFC /
Corporate Bonds issuer.
4. The exposure limits (both against the Rev Repo counter party and the TFC/
Corporate Bonds issuer) shall be determined and monitored in line with
Prudential Regulations following the credit approval process of MCB.
5. Exposure limits shall be approved according to the appropriate level of
authority.
6. Treasury will be assigned two types of credit limits for TFC / Corporate Bonds
Rev Repo.
a) Portfolio limit for Rev Repo against TFCs
b) Scrip wise Repo limits
8. TFCs / Corporate Bonds (against Repo) will be marked to market daily and if
the MTM value of TFC/ Corporate Bonds falls below the Price-2 plus hair-
cut/margin, the counter party will be asked immediately by the treasury front
office to either increase the security or to reduce the exposure.
9. FIPS-MRMD shall monitor Rev Repo exposure limits against TFCs/ Corporate
Bonds.
For Repo/Rev Repo transactions Master Repo agreement must be signed between
the counter parties.
Operations Group shall be responsible for deal confirmations, book keeping,

maintenance of Master Repo Agreement, reconciliations and reporting.
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The investment limits for Rev Repo Lending shall be tenor wise, counter party20 and
Rev Repo Lending portfolio limits. FIPS & MRMD is responsible for Call Lending
limits monitoring.
6.8.5 Term Finance Certificates (TFCs)
TFCs are coupon bearing debt instruments issued by the corporate entities and
financial institutions. These are capital market instruments classified under fixed
income securities. TFCs may be listed or unlisted. TFCs may be secured (by some
fixed/tangible assets or receivables) or unsecured to meet tier II requirements of
the banks.
Capital Markets and Treasury & FX Group are authorized to invest in listed TFCs
for Trading, AFS and HTM portfolios (listed only). WBG/CBBG are authorized to
invest in TFCs for their AFS and HTM portfolios only. WBG/CBBG are authorized
to invest in unlisted TFCs for their HTM portfolio.
Operations Group is responsible for deal confirmations, book keeping,

reconciliations and reporting for the investments made by Capital Markets and
Treasury & FX Group while WBG/CBBG are themselves responsible for these
activities.
Investment limits (case to case basis) for TFCs are proposed by the business groups
to FIID.FIID prepares a credit proposal for approval by the business Group Head.
Subsequently, the proposal is sent to FIPS & MRMD who processes these requests
and recommends to appropriate level of authority for review/approval
FIPS & MRMD is responsible for monitoring counterparty TFC limits for the
investments made by Capital Markets and Treasury & FX Group while Credit Risk
Management is responsible for monitoring TFC exposure booked by WBG and
CBBG.
6.8.6 Trade Finance / Bank Guarantee Lines
MCB has a broad customer base involved in both local and foreign trade. To
facilitate trade business, MCB extends TF/BG lines to various banks of acceptable
risk. These lines are utilized by the branches for
i. For financing against export bills drawn under L/Cs
ii. Confirmation of L/C issues by them
iii. Acceptance of standby letters of credit and guarantees as security for
financing
The TF/BG limits are managed by FIID. Branches request for exposure limits on
case to case basis.
20
Counterparty limits will require normal credit approvals as stated Chapter 3.2 of the
handbook.
564
6.8.7 Rupee Drawing Arrangements
These lines are extended to smaller or mid-size banks whose branches are not
present in the cities where they want to remit funds on behalf of their clients and
make payment to the beneficiaries. Accordingly, RD agent banks utilize MCB
branch network for the payment of their drafts, mail transfers or any other
remittances. Following is the mechanism for transactions under rupee drawing
arrangements.
• Client comes to the counter of the RD agent bank for issuance of draft payable
in a city where the bank has no branch.
• The RD agent bank issues a draft drawn on the MCB branch in beneficiary’s
city. At the same time the RD agent bank issues SBP cheque favoring
participating branch of MCB in that city against this draft.
• According the agreement, MCB branches pay the draft / remittance instrument
if the amount falls within a minimum threshold amount. If the amount is more
than the threshold amount, the paying branch confirms receipt of funds against
the subject draft from the draft issuing branch and make payment upon receipt
of funds.
The exposure limit is assigned to manage the exposure created due to delay in
receipt of funds from RD agent bank to MCB. The limits are managed by FIID.
6.8.8 Foreign Exchange and Derivative Exposures
Foreign Currency Placement

Depending upon the liquidity position, withdrawal / deposit behavior of FCY
deposits, interest rate differential between PKR and FCY and the SWAP premiums
FCY placement are made with the correspondents. FCY Placements are made for
short tenor not exceeding 1 year. Placements are made only with the stable and
reputable international banks having banking relationships with MCB.
Treasury & FX Group is authorized to deal in FCY placement with the financial
institutions with approved FCY placement limits. FCY placement limits for banks
are proposed by the Treasury to FIID.FIID prepares credit proposal approved by the
Group Head. The proposal is sent to FIPS & MRMD who processes these requests
and recommends to appropriate level of authority for review/approval.
Operations Group shall be responsible for deal confirmations, book keeping

settlement and reconciliations.
Spot/settlement exposures
FX Spot/settlement exposures are created while dealing with interbank clients.
Spot exposure is booked on an interbank client when the remaining business days
to maturity are two. If remaining business day to maturity is one the exposure is
called as tom. If the settlement of the transaction is to be carried out today, the
exposure is termed as intraday settlement exposure. However for USD – PKR (sell)
transactions the intraday settlement is not created because the PKR amount is
received during SBP banking timings while USD is to be settled late in the evening.
565
To cover this exposure, client wise spot / settlement limits are allocated. The
exposure is calculated by summing all transactions in absolute terms within T+2
days.
Derivatives
The derivative products include the following:
Currency Forward
A Currency forward is the forward buying / selling of foreign currencies.
These are non-fund based transactions and are converted into fund based
only on settlement date. Currency forwards may be booked in any
authorized foreign currency. Value of the forward transactions is determined
by marking to market on daily basis. Since the value of the exposure
changes based upon the market rates, the credit exposure is created due to
exchange difference between the booked rate and the prevailing market rate.
To manage this exposure, notional exposure limits are assigned to
counterparties.
Forward Rate Agreement (FRA)

An FRA is an agreement between two parties where
• each party contracts to make interest payment to the other
• on the predetermined date in future
• based on a notional principal amount
• denominated in the same currency
• one party is the FIXED RATE PAYER - the fixed rate being agreed at
the inception of FRA
• the other party is the FLOATING RATE PAYER – the floating rate
being determined on settlement/start date by reference to a specific
market rate
• there is no exchange of principal – only exchange of interest
Each transaction is marked to market daily. Credit exposure is created due

to the difference between the fixed rate and the floating rate.
Before entering into the FRA transactions approvals / credit lines must be
obtained from the appropriate level of authority including SBP. FRAs are
permitted only in PKR. Separate counterparty limits may be approved for
FRAs for interest rate derivatives as a combined limit for FRA and IRS.
Interest Rate Swaps (IRS)

IRS is an agreement between two parties where
• each party contracts to make periodic interest payments to the other
• on a predetermined set of dates in future
• based on a notional principal amount
• denominated in the same currency
• one party is the FIXED RATE PAYER - the fixed rate being agreed at
the inception of the swap
• the other party is the FLOATING RATE PAYER – the floating rate
being determined during the lifetime of the swap by reference to a
specific market rate
566
• there is no exchange of principal – only exchange of interest
Before entering into the FRA transactions approvals / credit lines must be
obtained from the appropriate level of authority including SBP. FRAs are
permitted only in PKR. Separate counterparty limits may be approved for
FRAs for interest rate derivatives as a combined limit for FRA and IRS.
Options
Options are financial instruments that give the right to the holder of the
option to:
• buy (call option) the agreed amount of underlying if the transaction is
favorable to holder at the exercise price
• sell (put option) the agreed amount of underlying the transaction is
favorable to holder at the exercise price.
On the other hand, options are obligation to the option seller (Writer).
Options can be written on currencies, commodities, interest rates, stock
exchange index, etc. Options are of various types depending upon different
factors e.g.:
• the date/period of execution like American, European, Asian,
Bermudan Options etc.
• price like knock in knock out , barrier, look back
• Event like digital options
Options on exchange rate and interest rate like Cap, Floor or Collar etc. are
authorized transactions subject to general or specific permission from SBP.
Exposure limits for counterparties writing options are required.
Structured Products
Structured products are combinations of options, forwards and equity/fixed
incomes investments. Before entering into the transactions separate
approvals / credit lines must be obtained from the appropriate level of
authority including SBP. Details of these transactions may be obtained from
PPMs developed by Treasury.
Operations Group shall be responsible for deal confirmations, book keeping,

settlement, reconciliations and revaluation of these products.
Derivative exposure limits are proposed by Treasury & FX Group to FIID who are
responsible for managing the relationship of financial institutions. Presently limits
are allocated / approved only for hedging purposes. FIPS & MRMD is responsible
for limit monitoring.
6.8.9 Limit Setting
Treasury & FX group or any other Business Groups shall make their propositions
annually to FIID who is responsible for managing the relationship with the financial
567
institutions. The proposals are recommended/approved by the Divisional Head FIID

and the Group Head WBG. The proposals include following information where
applicable.
• Financial analysis (capital adequacy, asset quality, liquidity, earnings profile

and sensitivity)
• The products, customers, branch network/market presence and strategy
• Industry analysis (comparison with the peer group)
• The market and regulatory environment
• Comments on Management and sponsors along-with the shareholding
pattern
• Existing limits , proposed limits , limits recommended by FIID and expiry
dates
• Previous performance for utilization and justification for
renewal/enhancement
The proposal is forwarded to FIPS & MRMD for review to forward the credit
proposal to the appropriate level of authority for review/approval. Similar
procedure is followed if amendment / enhancement in limits are required during
the financial year.
6.8.10 Limit Monitoring
All exposures limits booked by treasury & FX groups are monitored by FIPS &
MRMD. While the exposures booked by the other business groups shall be
monitored by FIID. Limit exception is reported to the respective business group
head and is advised to comment on the reason of breach. The business group head
forwards the comments/reasons to FIPS & MRMD. FIPS & MRMD reviews the
request, and forwards to the appropriate level of authority with comments. The
regularization/remedial actions after receiving from the approving authority are
communicated to the respective business for implementation.
568
6.9 Market Risk Leading To

Credit Risk
6.9.1 Introduction
6.9.2 Off-Balance Sheet Exposure (Market

Related)
6.9.3 Credit Exposure Limit Approval Process
6.9.4 Credit Exposure (Foreign Currency Trade

Finance Products)
6.9.5 Credit Exposure created due to change in

the value of security
569
6.9.1 Introduction
Market risk arises from changes in market rates (such as Interest Rates, Foreign
Exchange Rates and Equity Prices) as well as in their correlations and implied
volatilities. As defined by SBP (in general) assets & liabilities booked under
accounting classifications Held for Treading (HFT) and Available for Sale (AFS) with
short term investment horizon are treated under the Trading Book. Assets &
liabilities booked under accounting classification Held to Maturity (HTM) or booked
in AFS but with the intent to carry the position for long term are treated under
Banking Book.
Generally trading book is managed by Treasury & FX Group and the Capital
Markets Group. However, some of their assets are classified under banking book
(fixed income securities classified under HTM and the capital market investments
classified as strategic investments). Further all lending and borrowings plus
forward commitments for purchase & sale (of foreign exchange, fixed income
securities, equities) and lending /borrowings are subject to market risk.
Financial assets & liabilities booked and managed by CBBG and WBG are treated
under Banking Book as they are generally required to carry exposure till maturity
of the financial instrument or the facility.
Market risk leading to credit risk may be broadly classified into the following
categories.
a) Off balance sheet exposure (market related)
b) Credit exposure (Foreign Currency Trade Finance Products)
c) Credit Exposure created due to change in the value of security
6.9.2 Off-Balance Sheet Exposure (Market Related)
Market risk created due to off-balance sheet exposures where commitments are
made between the counterparty and the bank leads towards credit risk. Credit risk
created due to rate/price movement may be segregated according the sources of
market risk as described below.
Interest rate Risk

Interest rate risk is created due to movement in interest rate affecting /
changing the market value of the exposure. This movement can be a single
point shift or it may be due to changes along the yield curve (yield curve
risk). Following are the products where the bank is exposed to credit risk
due to movement in interest rates.
a) Forward purchase / sale of securities: e.g forward purchase/short

sale of T-bills and PIBs and forward legs of the repo/rev repo
transactions. Credit risk in Forward purchase of securities is
created when the interest rates fall and market price of the
purchased instrument increases. Credit risk in Forward sale of
securities is created when the interest rates rise and market price
of the purchased instrument falls. These transactions are generally
carried out by Treasury & FX Group.
570
b) Forward borrowing / lending: Forward commitments by the

financial institutions and the corporate lending/borrowing. These
transactions are generally booked by WBG and Treasury & FX
group.
c) Interest rate derivatives: e.g. Forward Rate Agreements (FRAs),
Interest Rate Swaps (IRS), Interest rate options (Caps/
Floors/Collars) quantos, Cross currency options etc. The
transactions are booked by Treasury & FX Groups. However the
relationship may be maintained by WBG/CBBG.
Foreign Exchange Risk

Foreign exchange risk is created due to movement in exchange rate. Forward
exchange rates are based upon the spot rate and the interest rates of both
the currencies. If any of these factor/(s) changes forward rate is changed.
6.9.3 Credit Exposure Limit Approval Process
Following procedure shall be followed for approval of the above referred

transactions.
1. FIPS & MRM division shall issue schedule for credit conversion factors
periodically. The product-wise conversion factors to be used currently are given
below.
Conversion
Products Factors
Forward purchase/sale of fixed income securities or lending 1%
FRA 1%
IRS 5%
Currency forwards 5%
cross currency swaps 5%
Currency options (if MCB is buyer) /structured products 2%
2. The relationship shall multiply the notional amounts (exposure limits)

corresponding to facilities.
3. The numbers so obtained shall be the credit exposure corresponding to the
facility.
4. Relationship is authorized to decide for acceptance of securities against these
exposures.
5. Business Groups managing the relationship shall forward limit requests to RMG
as per the format given below. For Corporates and retail business they shall
forward their request to Credit Review North/South according to their area of
jurisdiction while for Financial Institutions and Public Sector entities the
requests shall be forwarded to FIPS&MRM division.
571
Products Notional Conversion Credit Outstanding Mark

amount Factors equivalent to Market Value
(last month
balance)
Forward purchase/sale of
fixed income securities or
lending
FRA 1%
IRS 5%
Currency forwards 5%
Cross Currency Swaps 5%
Currency options (if MCB
is buyer) /structured
products 2%
6. These limits shall be processed in line with the instructions contained in section
3.2 of the handbook.
7. Per Party Exposure limits (for Prudential Regulations Compliance) for the above
products shall be determined in line with the instructions contained in
Prudential Regulations.
6.9.4 Credit Exposure (Foreign Currency Trade Finance Products)
Trade finance products where exposure is created in FCY and are secured by
securities denominated/priced in PKR are exposed to credit risk due to movement
of exchange rate. e.g. letters of credit, standby letters of credit, import bill
acceptances, trade finance loans (FCIF, FCEF FDBP).
To manage credit risk stated above following procedure shall be adopted.
1. Branches shall report Transaction & Client wise exposure (stated in FCY and
equivalent PKR) on monthly basis to CRC of their area.
2. CRC shall revalue the exposure by using revaluation rates of the month-end
communicated by Treasury Operation on each month-end.
3. On the basis of revalued exposure amount CRC shall determine adequacy of
the securities and advise to relationship to cover up the shortfall if any.
6.9.5 Credit Exposure created due to change in the value of security
Lending facilities secured by price sensitive assets like, deposits denominated in a

currency different from the currency of facility, fixed income facilities, stocks or any
other financial instrument sensitive to price movement. E.g. advances against FCY
deposits, loans secured by fixed income securities like T-bills, PIBs and TFC.
To manage credit risk (except booked by Treasury & FX Group) stated above
following procedure shall be adopted.
572
1. Branches shall report Transaction /Client wise exposure, number of units of

security, currency of security on monthly basis to CRC of their area.
2. CRC shall request FIPS & MRM Division for provision of revaluation rates
and revalue the securities by using revaluation rates on each month-end.
3. On the basis of re-valued amount of securities CRC shall determine
adequacy of the securities and advise to the relationship to cover up the
shortfall if any.
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Credit Handbook
Section 6
Appendices
574
Cases eligible for relaxation under Prudential Regulations
1. For bid bonds issued on behalf of local consultancy firms bidding for
international contracts where the consultancy fees are to be received in foreign
exchange, and including Bid Bonds issued on behalf of all contractors of goods
and services bidding against International Tenders.
2. For issuance of performance bonds on behalf of local construction companies /
contractors of goods and services bidding for international tenders. Provided
that the liability of the bank / DFI will be on reducing balance basis after
taking into account progressive billing certified by the beneficiary/project
owner and payment received against these bills.
3. For issuance of guarantees on behalf of local construction
companies/contractors of goods and services bidding for international tenders
in respect of mobilization advance.
(i) Guarantees issued should contain clause that the mobilization advance
and other proceeds under the contract shall be routed by the
beneficiary/project owner through the account of the contractors
maintained with the guaranteeing bank / DFI.
(ii) At the time of issuing such guarantee the Construction
Company/contractor shall sign an agreement with the bank / DFI that
cash proceeds out of mobilization advance will be released as per
satisfaction of the bank / DFI about the progress of the contract.
4. While issuing guarantees to the exporters of cotton in terms of F.E. Circular
No. 77 dated December 4, 1988, banks / DFIs may settle the type and
quantum of security with their customers.
5. Issue of performance bonds/bid bonds and guarantees issued for mobilization
advances on behalf of the manufacturers of engineering goods. The term
‘engineering goods’ shall have the same meanings as are given to locally
manufactured machinery in State Bank of Pakistan scheme for financing
locally manufactured machinery. Such condition may, however, not be
necessary in case of guarantees issued by the International Banks.
575
MCB BANK LTD
WEEKLY STATEMENT OF FINANCES TO COTTON

GINNERS AS ON .
RUPEES IN MILLION
Cash Finance Stocks under pledge Grower Finance Remarks
Total Stuck
Name of Stuck- (mention
Cotton bales Phutti value -up Limit
borrowers and Limit Amount Amount up also other
of Amou sanct
branch amount o/s Valu o/s Amount FB & NFB
Nos Value Kgs stock nt ioned
e o/s if Any)
TOTAL – THIS
WEEK :
TOTAL – THIS
WEEK :
(Note:- Only Finance against cotton to be reported in this statement)
576
TEXTILE FINANCING – FORMULA FOR WC / CF LIMIT

(MILL – 14,400 SPINDLES - Data used is illustrative)
(PKR in Millions)
a) Production per Spindle/Shift. (Oz). 8 10 12 Remarks
b) Production per Spindle/day (Oz), 3 on
24 30 36 ax3
basis of Shifts/Day
c) Production for 14400(Lbs.)
21600 27000 32400 ('b' ° 14,400) ÷ 16
Spindle per day.
d) Annual Production, 348 days (Lbs.). 7516800 9396000 11275200 c ° 348
e) Add: 15% wastage (Lbs.). 1326494 1658118 1989741 f(i) ° 0.15
f) i) Total Cotton Requirement (Lbs.). 8843294 11054118 13264941 d/0.85
ii) No. of Bales (Approx. 370 Lbs. per Bales). 23901 29876 35851 f(i) / 370
iii) Converted in Maunds of 40 Kgs. 101578 126973 152368 f(ii) ° 4.25
g) i) Value of 1 year's consumption,
Cost @PKR3000/= Per 40 Kg. (say) 305 381 457 {f(iii) ° 3000) ÷ 1,000,000}
ii) Value of 6 month's consumption 152 190 229 g(i) ÷ 2
iii) Limit at 15% Margin 130 162 194 g (ii) ° 0.85
577
Formula for calculating limit for mills with different spindleage than above:
Formula:
Limit for Mill with 14,400 spindles x number. of spindles in operation for the mill in
question.
Example # 1 Limit for Mills with 12,480 spindles = 8Oz consumption per
spindles
130M
= ¯ 12,480 = Rs.113M
14,400
Example # 2 a) Limit for Mills with 17,700 spindles =10Oz consumption per
spindles
162M
= ¯ 17,700 = Rs.199M
14,400
b) Limit for Mills with 17,700 spindles =10.5Oz consumption per

spindles
162M 10.5
= ¯ 17,700 = = Rs.209M
14,400 10
578
CREDIT PROPOSAL CUM APPROVAL OF FINANCE

For Business Purposes cash/ near cash collateralized financing only
CREDIT PROPOSAL FROM BRANCH
Date:___________
Branch Account No. Type

Branch Code
Region
Circle Borrower's Constitution
Name of Borrower
Borrower's Address
Existing Rating
UER Details
EXISTING MCB FACILITIES (If any) IN PKR PRESENT PROPOSAL IN PKR

NATURE LIMIT O/S EXPIRY SECURITY NATURE LIMIT MARK UP MARGIN EXPIRY
TOTAL
DETAILS OF DEPOSITS WITH MCB
PKR PKR
Current A/c PLS Sav. A/c
TOTAL TDR OTHERS
SECURITY OFFERED (TDRs / SSCs / DSCs etc.)

NAME OF
PRESENT
FACE DATE OF ISSUING BANK OFFICE DEPOSITER /
TYPE DATE OF MATURITY ENCASHMENT
VALUE ISSUE & BRANCH CERTIFICATE
VALUE
HOLDER
TOTAL
579
BRANCH RECOMMENDATION / SIGNOFF
________________ _________________ ________________ _____________ _____________

Credit Incharge/BM Regional Manager General Manager Business Head Group Head
APPROVAL / REGRETTAL FROM CREDIT REVIEW AUTHORITY
APPROVAL / REGRETTAL (Amount in PKR)
MARKU PRESENT ENCASHMENT

NATURE LIMIT SECURITY & ITS FACE VALUE MARGIN EXPIRY
P VALUE
Total
New Rating:
Decision: __________________ Next review date:____________________
(Approval / regrettel) (within next 12 months)
Special Conditions (if any):
___________________________________________________________________________________
___________________________________________________________________________________
_____________ _________________ _____________

Processed By Reviewed & Approved By
Recommended By
Date: Date: Date:
580
Credit Handbook
Section 7
Lending Operations
In
Sri Lanka
581
Section 7:
Lending Operations in Sri Lanka
7.1 Introduction
7.2 Regulatory Requirements
7.3 Bank Financing
7.4 Security Offered
582
7.1 Introduction
MCB’s foreign operation is restricted to only one country, Sri-Lanka. The financial
market of Sri-Lanka has some particular features that are common to that market
only and have wide spread usage while the same are not in practice in Pakistan.
This Chapter will identify and discuss the differentiating factors of Sri-Lankan
financial market, pertaining to banking sector. It is therefore understood that
factors / facilities not mentioned are common to Pakistan and Sri-Lankan market.
These differentiating factors can be categorized into three categories as follows:

a) Regulatory requirements
b) Bank facilities
c) Security structuring
7.2 Regulatory Requirements
Financial Institutions in Sri-Lanka are regulated by central bank namely Central

Bank of Sri-Lanka
The central bank has not provided any set of formal guidelines for financing,
however, per party limit is restricted to 30% of the bank’s paid-up capital, which
can either be funded or non-funded or both, subject to condition that total of all
borrowers enjoying facilities over 15% of paid-up capital each, should not exceed
50% of the advances portfolio. Exposure covered against cash or financial
guarantees of other banks is excluded from the exposure.
Being an interest based system, there is no restriction of charging interest on

interest i.e. interest can be capitalized after due date and may carry penal interest
rate.
Process of loan classification is in accordance with the Banking Act of 1988 and is
summarized as below (detailed process is attached as Appendix I):
a) Account is termed as ‘non-performing’ after 3 months; if it has remained

static and in excess of approved limits (in case of OD) and when principal /
interest has been in arrears for that period.
b) Account is classified as ‘Sub-Standard’ if repayment of principal / interest is
in arrears for more than 6 months but less than 12 months.
c) Account is classified as ‘Doubtful’ if credit facilities are in arrears for 12 to
18 months
d) Account is classified as ‘Loss account’ if credit facilities are in arrears for
over 18 months
583
7.3 Bank Financing
Some the facilities not practiced in Pakistan are summarized below:
Overdraft (OD)
OD facility is equivalent of Running Finance facility in Pakistan. The main purpose

of this facility is to meet day-to-day working capital requirements of the client.
Modus operandi is exactly the same as of RF facility, except that interest can be
capitalized at maturity date.
Cheque Purchase Discount Facility
Cheque Purchase Discounting Facility (CPDF) is utilized for purchase of receivables

in the form of post-dated cheques. These cheques represent payment to the seller
for any underlying business activity and are drawn on the buyer / cash cheques.
The tenor of the cheques may vary according to the agreed credit period and is in
the range of 30-120 days. Under CPDF, these cheques are presented to the bank by
the seller, which in turn are purchased / discounted and proceeds credited to
company’s (seller) account.
Cheque discount liability is maintained in a separate account (similar to OD) and

the interest calculated on the daily balances and debited to the current account on
the end of the month. Each discounted cheque on the due date is presented for
collection and the cheque discount liability is reduced by the value of the cheque.
In the event of a discounted cheque being returned unpaid, this would be recovered
from the current account. In order to safeguard Bank’s interest; an indemnity is
also obtained from the client to the effect that in case any discounted cheque is
dishonoured, they will make the payment good, immediately.
Short Term Loan
Short-term Loan (STL) is extended predominantly to facilitate the retirement of

import documents and in exceptional cases, is also allowed to accommodate local
purchases of the client exclusively against sale invoices. STL facility is disbursed
in tranches and each tranche is usually valid for 30-120 days depending on the
customer’s credit requirement. These loans are also extended for a fixed short time
period.
An account is created for each STL. Interest is calculated on the daily balance and
debited to the current account on month end. At the end of the STL maturity, STL
is recovered in full by debiting the current account.
7.4 Security Offered
Clean lending
Lending to large business conglomerates is mostly based on their cashflows and

group support. Companies do ask for clean facilities and banks tend to oblige as
584
there is no regulatory requirement against it. Security documentation involved is

company’s own guarantee and D.P. note or in some cases (where company’s
cashflows are not strong) covered by corporate guarantee of one of the group
companies. Facilities are termed as ‘clean’ as no charge is registered on company’s
assets with SECP.
Such clean facilities are mostly demanded by the top tier corporate names in the
Sri-Lankan market.
Property mortgage
Collateral in shape of mortgage of property is considered as one of the better

securities that can be offered against facilities. Mortgage is registered with the ‘land
registry office’ for the principal amount while the mortgage documentation allows
recovering any outstanding interest from the sale of same property.
In case the mortgaged property is in the name of borrower and the mortgage
amount is above SLR 5.00 mn; bank can execute ‘parate execution’ and can
therefore on its own option, without recourse to a court, take over the possession
and management of the mortgaged property, cause it to be sold and issue a
certificate conveying title in the property to the purchaser. However, in case of
third party mortgage, bank has to initiate legal proceedings for disposal of property.
Pledge of goods
Financing against pledge of goods is carried out by most local banks but on a
limited scale, however, concept of ‘effective pledge’ is not followed. In most
cases, pledged goods are retained in the warehouse of the customer (either owned
or rented by the client) and concept of dual control is adopted for the control of
pledge goods. Third party involvement of bank’s nominated supervisors
(muccadam) for safe custody of pledged goods is not available to banks.
Local banks are also engaged in "pawning" (financing against pledge of gold and
jewellery) which has not been offered by MCB in Pakistan. In the case of
pawning, as the items involved can be held in bank's safe deposits and vaults;
pledged jewellery is in the possession of the bank only.
In case of commodity financing, as well as other goods under pledge, these are
held at customer's warehouse which may also contain goods that belong to the
borrower and are not pledged to the bank. Accordingly, local practice is to have
a dual control over pledged goods to safe guard bank's interest without
arrangement of Muccadam.
Procedure followed for pledge financing is as follows:
• Pledge is allowed for import financing and \or local purchases of stocks.
• Pledgor provides a list of goods along with costs (to be verified at bank’s
discretion).
• Bank allows financing against value of the goods pledged with margin as per
its discretion.
585
• Funds are released at the time of retirement of import goods or release of pay
order for local goods, against pledge agreement
• Pledged goods are insured against all major risks
• A key register is maintained to ensure proper control over locks and to
monitor movement of keys used to secure stores.
• The customer is free to redeem the goods at any time within the stipulated
period and partial deliveries permitted based on payments made. The bank
must ensure that at all times the value of pledged goods is in excess of the
loan outstanding.
• Client submits monthly stock statements and physical verification of stocks
carried out quarterly.
Negative Pledge
A ‘negative pledge’ is a provision in a contract which prohibits a party to the

contract from creating any security interest over certain property specified in the
provision.
Negative pledge often appears in security documents, where they operate to

prohibit the person/legal entity who is granting the security interest from creating
any other security interests over the same property, which might compete with (or
rank pari passu with) the security of the first secured creditor under the security
document in which the negative pledge appears.
Although not so common in Pakistan, financing against ‘negative pledge’ is

common in Sri-Lanka. Companies enjoying credit facilities against such covenant
does provide total borrowings with other banks in the stock report for lender’s
comfort.
Cheque purchase / Discount
Cheque purchase discount facility (CPDF) is one of the most commonly offered
facilities by all banks. The facility offers to purchase / discount company’s trade
receivables that are in the form of cheques and makes funding available to
customer immediately for bridging its working capital requirements. Normally the
tenor of these cheques is for 90 days. Cheques are presented in clearing /
collection on maturity and CPDF is adjusted from the proceeds. Legal recourse
against default in payment of these cheques is through civil courts. In view of the
risk of default, such facility is offered by MCB to customers with immaculate track
record with MCB and whose percentage of returned cheques is generally around
5%. In exceptional circumstances / peak seasons this return %age may reach up to
10%, but is replaced immediately by fresh cheques.
Hypothecation of Stocks:
Most of the working capital funded lines are allowed against ‘stock mortgage’
registered with the Land Registry. There are different land registries for different
areas of Sri-Lanka. As per "mortgage act", if the mortgage bond, either movable or
immovable, is not registered in the land registry it cannot take legal effect. The
586
mortgages for limited companies and other entities like partnerships and
proprietorships are also registered with the land registry. The registration of
movables at the land registry does not give a ranking like first charge, second
charge. This only applies to limited companies where the registration at SECP gives
a priority to the particular charge.
Leasing:
In the absence of any local manufacturer of vehicles, bulk of the country’s

requirement of vehicles is met through import of re-conditioned cars and remaining
through brand new vehicles. Leasing business is very competitive and therefore
keeping in view the market requirement, leasing of second hand, un-registered
vehicles is allowed at ‘Nil’ margin.
587

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MCB Bank Limited Credit Handbook

1.1 Risk Management Policy Framework

1.1 Risk Management Framework

1.2 Credit Handbook

The importance of effective risk management on a bank-wide basis is necessitated

1 Communicated via SBP BSD Circular # 3 of 2007 dated April 4, 2007

The primary audience of this document includes the following:

a) Individuals involved in the marketing of products that lead directly or

1.3 Scope of the Document

• Credit Risk Management Guidelines

1.4 Maintenance & Upgrade

Whenever a change of a permanent nature is made to any credit procedure the

1.5 Credit Handbook Rollout Plan

The Handbook shall be disseminated to a bank-wide audience following approval of

1.6 Monitoring Effectiveness & Implementation

The Credit Handbook shall be continuously monitored with regards to

1.7 MCB’s Credit Risk Initiatives

MCB’s goal as a bank is to achieve compliance with the Foundation Internal

a) Use of ECAIs: The Bank plans on using External Credit Assessment

the issues surrounding this area, the following factors need to be

5As defined in the CRC Procedures Handbook

• While the previous credit manual contained a separate section on Agricultural

Credit Risk Management

Credit Risk Management at

2.1 Guiding Principles for Credit Risk

2.1 Guiding Principles for Credit

2.1.1 Defining Risk

2.1.1 Defining Risk

2.1.2 Risk Management

• Risks are understood

The organizational structure through which risk management activities are

Overall risk management policies and tolerances should be set on a comprehensive,

2.1.3 BIS Guidelines for Risk Management in Banks

The bank specific guidelines issued by Basel Committee on Banking Supervision

• A bank’s policies should appropriately address validation of any internal credit

• A bank’s aggregate amount of individual and collectively assessed loan loss

• A bank’s use of experienced credit judgment and reasonable estimates are an

2.1.4 Lending Principles at MCB

• Integration of risk management

A brief description of each of these principles is given below.

Integration of risk management

Business line accountability

In organizations with staff or support personnel dedicated to risk management

To understand the risk/return trade-off, profits and losses should be attributed to

Risk assessments should be validated by independent review functions with

Contingency plans should be reviewed regularly to ensure they encompass

2.2 One Obligor Principle and

2.2.1 One Obligor Principle

2.2.1 One Obligor Principle

In relation to a counterparty group, this principle is based on the assumption that

In relation to capital calculation under the Standardised Approach, this section

2.2.2 Group Definition

The definition of a group according to Prudential Regulations of the State Bank of

“Group means persons, whether natural or juridical, if one of them or his

(b) Control refers to an ownership directly or indirectly through subsidiaries, of

(c) Substantial ownership / affiliation means beneficial shareholding of more than

• Beneficial shareholding of more than 25% by a person and / or by lineal

• Control over election of a majority of directors.

• Exercise of a ‘controlling influence7’ over management or policies.

• Common proprietorship / partnership / directorship by a person, and / or by

However, ownership / directorship in or by Government owned entities and

o Directors holds related professional / technical qualifications and who are

7 To illustrate the point:

o Any other basis, on a case to case basis.

Adequate interfaces/ mapping are created amongst various systems at the

Mechanism is developed and implemented for maintaining data integrity and

Exposures are correctly assigned to their respective Basel II asset classes