The State Bank of Pakistan (SBP) on Monday amended the prudential regulations for commercial banking with an aim to provide flexibility to the banks and Development Finance Institutions (DFIs).
According to the amendments made in paragraph 2 of Regulation R-7 of the prudential regulations, the existing limit of $ 0.25 million, for issuance of unsecured guarantees by the banks and DFIs in the country against the back to back and/or counter-guarantees of the banks situated in foreign countries not meeting the prescribed rating of at least ‘A’, has been enhanced to $ 0.5 million, if tenor of such guarantees is up to one year.
Moreover, for the back to back and/or counter-guarantee issuing banks situated in foreign countries, National Scale Rating (NSR) of at least ‘A’ or equivalent shall also be acceptable provided the guarantee issuing bank in Pakistan is comfortable with it.
Accordingly, the amended Paragraph 2 of Regulation R-7 reads in full as: “The requirement of security can also be waived by the banks/DFIs in case of guarantees issued to Pakistani firms and companies functioning in Pakistan against the back to back/counter guarantees of branches of guarantee issuing bank/DFI or banks/DFIs 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, Fitch-Ibca or Japan Credit Rating Agency (JCRA)”. Besides, in case the counter guarantee issuing bank is situated in a foreign country, NSR of at least ‘A’ or equivalent or the rating of at least ‘A’ or equivalent by a local credit rating agency of the respective country shall also be acceptable, provided the 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 $ 0.25 million irrespective of tenor and up to $ 0.5 million if tenor is up to one year, subject to internal credit controls and approvals of the concerned bank/DFI in Pakistan.
For transaction amounts greater than $ 0.25 million having tenor of more than one year and for transaction amounts greater than $ 0.5 million irrespective of tenor, banks and DFIs may approach the State Bank for specific approvals and exemption, on case by case basis, where the prescribed minimum rating requirement cannot be complied with.
“The banks and DFIs are encouraged to set internal limits for acceptance of guarantees issued by other banks/DFIs based on, interalia, their own risk appetite and risk profile of the counter-guarantee issuing bank,” said the SBP circular.
