Financial Banks in Pakistan

Submitted to
Prof. Sajid Nasir Submitted By Hira Shiekh Awais Ijaz Sajad Qaisar Shoaib yahya bb08006 bb08020 bb08033 bb08048

University Of the Punjab

Gujranwala Campus

Table of Contents
Consumer banking Page 1

Summary.3 Introduction..4 Products and services.5 Auto loan5 Home loan.5 Personal loan6 Mobile Services7 Credit & Debit Cards.9 SBP regulations for Consumer banking.9 Regulations for Auto loans10 Regulations for Home loans.10 Regulations for Personal loans11 Regulations for Credit cards.11 Credit Information Bureau12 Introduction..12 History12 Role..12 Recommendations14

Consumer banking

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Executive summary

This report discusses what products and services are offered in consumer banking, what are the rules and regulations set by the State Bank of Pakistan. Consumer banking which is one of the fastest growing sectors of Pakistan Banking Industry is also now major interest point for the banks. The products that are offered in consumer banking include auto loan, home loans, personal loans, and credit cards. Moreover, the SBP has devised some regulations regarding the consumer banking. The stated guidelines are related to how the loan should be given to a consumer, the documents required for the fulfillment of loan agreement, the guarantee needed, and the regulations regarding the collateral. At the end, the rule of eCIB is mentioned. A Credit Information Bureau is an organization that collects and collates credit data on borrowers from its member financial institutions. The financial data is then aggregated in system and the resulting information (in the form of credit reports) is made available on request to contributing member financial institutions for the purposes of credit assessment, credit scoring and credit risk management. The major purpose of this database is to enable the financial institutions to know the credit history of their prospective customers thus enabling them to make a more prudent decision.

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Introduction
In Pakistan all banks & DFI's works under the supervision of the State Bank of Pakistan, the four major sectors in which SBP has divided banks operations are Corporate, SME, Agriculture and Consumer. SBP provide regulations according to which all banks should work & continuously keep a track that banks are complying through the regulations or not. Consumer banking which is one of the fastest growing sectors of Pakistan Banking Industry is also now major interest point for the banks. Initially the consumer banking sector was only focused by the foreign banks but its efficiency & profitability attracted others to come towards this business but still the major share of consumer banking in Pakistan is in the hands of foreign banks. In a generic sense, institutional arrangements that provide consumers with financing support to enhance their consumption and as a result thereof, improve their standards of living should fall within the broad definition of consumer finance. For the past 50 years commercial banks in Pakistan had completely ignored consumer financing as an activity. Consumer banking is a huge industry with great profits massive potential for improving economic conditions. But the banking sector has to care more for its subscribers rather than solely about itself. It needs to offer itself. It needs to offer better services at better terms and needs to inform the consumer completely and fully about the services.

Contribution Consumer Banking in Economic Development

During past few years the domestic consumer finance emerged as one of the key factors to boost economic growth despite its comparatively low share of 14 per cent in the total private sector credit compared to its share in other countries like India and Indonesia where it stands at 24 per cent and 30 per cent respectively. Regional and global markets and economic players have become highly competitive and banking sector is more concerned to safeguard its capital and enrich itself with higher returns on loans than governments concern about boosting economic growth.

Consumer Financing & Economic Growth:

Lending through credit cards, personal loans, auto loans, loans for durables and housing finance emerged main streams of consumer finance. They shaped domestic demand and lending strategy by the banking sector in quite subtle ways. Consumer finance has also brought social change through higher circular of money and relaxation of income constraints for borrowing particularly among those middle class segments that were eager to become part of growing economy and keen to benefit from economic growth. Without consumer finance being in the driving seat of the banking sector, a large number of people would not have benefited.

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Products/ services of consumer financing:

Here are given below the products or services being offered to the individuals through consumer financing.

Auto loans
In Pakistan auto loans are purchase of brand new or used, imported or local cars for private use. Auto financing and auto leasing both facilities are offered by most of the banks. Salaried Persons/Self Employed Professionals / Business Persons who meet the terms and conditions to qualify for the finance are eligible for the loan. Some banks are also offering both variable rate & fixed rate options for auto loans. The average market rate for auto loans is 14-16%.for example. MCB offers its customers with auto loans on following bases.

Affordable: Lower mark up rates

Minimum 20% down payments Lower insurance rates

Special benefits:
No processing fee if the case is declined Pay your down payment after your loan is approved

Home loans
The loans taken for Buying, Building or Renovating of house/land are classified as home loans. For home loans both variable rate & fixed rate options are also available. The maximum duration offered by banks for home loans is generally twenty years thats why banks conveniently give loans to permanent employees of any firm to ensure strong repayment ability. For example, MCB provides its customers the home loan on following basis.

General terms and conditions:

Repayment in equal monthly installments (EMI). Title Search of property documents is mandatory. Personal information should be valid. Information regarding availed loans from other banks should be authentic. Mandatory verification checks of borrowers and collateral.
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Bureau reports regarding repayment history of all borrowers wherever applicable should be unambiguous, positive and satisfactory. Property insurance is mandatory.. Legal Opinion from banks approved professional lawyers. Income estimation through banks approved Chartered Accountants.

Eligibility criteria:

Applicant(s) must be Pakistani National. Salaried, Self employed businessmen (SEB) and Self employed professionals (SEP) are eligible for application. Satisfactory verifications Satisfactory bureau checks Satisfactory income estimation, property valuation and legal opinion.

Eligible Financing Limits:

Minimum Loan amount PKR 500,000.

Personal Loans:
Personal Loans are generally unsecured type of loans but in certain cases when the amount of personal loans increases the normal limit its remaining portion must be secured. Personal loans include loans for the purpose of education, marriage, purchase of consumer durables, furnishing, traveling, etc. Generally the limit for personal loans is maximum Rs.500, 000.

Mobile services:
Mobile is a quick, easy and secure way to top up mobile phone balances, transfer money, pay bills and do so much more. For instance MCBs globally recognized and award nominated mobile payments service allows existing account holders at MCB to conduct both non financial and financial transactions such as:

Check account balances View Mini Statements (last 6 transactions) Transfer funds to any MCB account Pay Utility Bill
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Consumer banking

Pay MCB Visa Credit Card Bills Recharge MCB Visa Prepaid cards Pay mobile post paid bills Prepaid recharge

Terms & conditions:

1. Acknowledge that you have read and Agree to be bound by these terms and a) the MCB

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Mobile complete terms and conditions and b) the terms and conditions of your automated teller machine (ATM) card and account or facility terms and conditions (other terms) for all other services, as updated from time to time. Acknowledge and agree that third parties may offer services, and that you may be subject to third party terms. MCB is not responsible for third party changes to the services. You assume full responsibility for the security and confidentiality of your PIN as well as for all transactions made using the said Mobile Phone (Cellular Phone) and PIN. You also assume full responsibility to inform the mobile phone service provider to block the SIM card or terminate the Mobile Phone Number in case of loss or theft of the mobile phone. You indemnify us for all losses and costs we may incur on your behalf due to: (a) Non-payment; (b) Any instruction exceeding the amount available in your bank account; (c) Unauthorized instructions executed which were not due to our negligence. (d) On account of your failure to notify us of the loss/theft. In case of loss/theft of your mobile phone, you undertake to notify the bank in writing or by calling our call center immediately of such instance to protect the interest of all parties. You agree that only your mobile phone service provider is responsible for its products and services. Accordingly, you agree to resolve any problems with your provider directly without involving us. Neither we nor any of our service providers assumes responsibility for the operation, security, functionality or availability of any mobile phone/Wireless Device or mobile network which you utilize to access MCB Mobile. We do not warrant that the MCB Mobile will be error-free or will meet any particular criteria of accuracy, completeness or reliability of information, performance or quality. We expressly disclaim all implied warranties, including, without limitation, warranties of merchantability, title, fitness for a particular purpose, non-infringement, compatibility, security and accuracy. You agree to pay for MCB Mobile in accordance with our fee schedule, as amended by us from time to time. You authorize us to automatically charge your account for all such fees incurred in connection with MCB Mobile we may add to or enhance the features from time to time. By using such added or enhanced features, you agree to pay for them in accordance with the fee schedule.
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9. You agree to exercise caution when utilizing the Services on your Mobile Phone and to

use good judgment and discretion when obtaining or transmitting information. 10. The Bank may at any time vary these terms and conditions by posting the same on the Banks Internet website and you hereby give your prior approval to such variations and waive any right of contestant in respect thereof and fully agree to be bound by the same. 11. You likewise agree to be bound by any and all laws, rules, regulations and official issuances applicable to MCB Mobile, now existing or which may hereinafter be enacted, issued or enforced, as well as such other terms and conditions governing the use of other facilities, benefits or services which we may from time to time make available to you in connection with MCB Mobile. Charges: An annual fee of Rs. 300 + FED is applicable for MCB Mobile customers. All customers get a One (1) Month Free trial period from date of activation. MCB does not charge a transaction fee. All transactions (financial & non financial) are FREE of cost. Transaction Limits: Overall Daily financial transaction Limit of Rs. 100,000. Number of financial transactions limited to 10 per day. Credit Card Bill Payment is as per your actual outstanding balance. It does not fall under the Overall Daily limit.

Credit-Debit Cards
Credit Cards mean cards which allow a customer to make payments on credit. Supplementary credit cards are considered part of the principal credit card. Initially only foreign banks are offering credit cards in Pakistan but now many local banks is also offering credit card facility. Debit cards are issued to account holders of any bank in Pakistan almost all the banks are offering debit card facility the amount used by the debit card holder is directly debited from the account of the card holder.

Some terms for credit cards:

The Card Member hereby hypothecates to the Bank as continuing security for any and all Charges and Liabilities and other amounts outstanding and payable by the Card Member to the Bank there under all present and future household goods owned by the Card Member including, without limitation, all consumer durables and household furniture and fittings of every type and description, household and office appliances, equipment such as Air conditioner, TV, VCR, Refrigerator, Computers, Cars, Vehicles, Cash, Shares and other valuables etc Consumer banking Page 8

SBP Prudential Regulations for Consumer Financing

The improvement in the banking sector has been not only in terms of asset growth and profitability but also in terms of diversification of products and risk profile. Almost every commercial bank in Pakistan now offer consumer financing, so the effective regulation for the consumer banking by the State Bank of Pakistan was must. In 2003 State Bank of Pakistan issued the First Edition of Prudential Regulations for Consumer Financing. The prudential regulations in force were mainly aimed at corporate and business financing. The SBP in consultation with the Pakistan Banking Association and other stakeholders has developed a new set of regulations which cater to the specific separate needs of corporate, consumer and SME financing. The prudential regulations will enable the banks to expand their scope of lending and customer outreach. Consumer Financing means any financing allowed to individuals for meeting their personal, family or household needs .The State Bank of Pakistan has divided the consumer financing in its prudential regulations into four major areas which are; Credit Cards Auto Loans Home Loans Personal Loans

Auto Loans
The vehicles to be utilized for commercial purposes shall not be covered under the Prudential Regulations for Consumer Financing. The maximum tenure of the auto loan finance shall not exceed seven years.

While allowing auto loans, the banks / DFIs shall ensure that the minimum down payment does not fall below 10% of the value of vehicle. In addition to any other security arrangement on the discretion of the banks/ DFIs, the vehicles financed by the banks / DFIs shall be properly secured by way of hypothecation. The banks / DFIs shall ensure that the vehicle remains properly insured at all times during the tenure of the loan. A detailed repayment schedule should be provided to the borrower at the outset. Where alterations become imminent because of late payments or prepayments and the installment amount or period changes significantly, the revised schedule should be provided to the borrower at the earliest convenience of the bank / DFI but not later than 15 days of the change. The banks / DFIs desirous of financing the purchase of used cars shall prepare uniform guidelines for determining the value of the used vehicles. However, in no case the bank / DFI shall finance the cars older than five years. Consumer banking Page 9

Home Loans
Banks / DFIs shall determine the housing finance limit, both in urban and rural areas, in accordance with their internal credit policy, credit worthiness and loan repayment capacity of the borrowers. Banks / DFIs shall ensure that the total monthly amortization payments of consumer loans, inclusive of housing loan, should not exceed 50% of the net disposable income of the prospective borrower. The lending bank / DFI will ensure that the loan amount is utilized strictly for the construction purpose and loan is disbursed in tranches as per construction schedule. Loans against the security of existing land / plot, or for the purchase of new piece of land / plot, for commercial and industrial purposes may be allowed. The house financed by the bank / DFI shall be mortgaged in banks / DFIs favour by way of equitable or registered mortgage. Banks / DFIs shall either engage professional expertise or arrange sufficient training for their concerned officials to evaluate the property, assess the genuineness and integrity of the title documents, etc. Banks / DFIs are encouraged to develop floating rate products for extending housing finance, thereby managing interest rate risk to avoid its adverse effects.

Personal Loans
The clean limit per person for personal loans will generally not exceed Rs 500,000/-.

Banks / DFIs may assign a clean limit beyond Rs 500,000 but not in excess of Rs 2 million to their prime customers who have extraordinary strong repayment capacity, moderate debt burden and a clean track record. In cases, where the loan has been extended to purchase some durable goods / items, including personal computers and accessories thereof, the same will be hypothecated with the bank / DFI besides other securities, which the bank / DFI may require on its own. The maximum tenure of the loan shall not exceed 5 years. However, this period may be extended to 7 years for loans / advances given for educational purposes, provided that disbursement of such loans shall directly be made by the bank / DFI to the educational institution and the borrower shall not be allowed to utilize / withdraw cash directly from the bank / DFI under this head for any other purpose.

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Credit Cards
The banks / DFIs should take reasonable steps to satisfy themselves that cardholders have received the cards, whether personally or by mail. Banks / DFIs shall provide to the credit card holders, the statement of account at monthly intervals Banks / DFIs shall be liable for all transactions not authorized by the credit card holders after they have been properly served with a notice that the card has been lost / stolen. However, the banks / DFIs liability shall be limited to those amounts wrongly charged to the credit card holders account. In case the cardholders make partial payment, the banks / DFIs should take into account the partial payment before charging service fee / mark-up amount on the outstanding / billed amount so that the possibility of charging excess amount of mark-up could be avoided. Due date for payment must be specifically mentioned on the accounts statement.

Banks / DFIs may, however, assign a clean limit beyond Rs 500,000 but not in excess of Rs 2 million to their prime customers who have extraordinary strong repayment capacity, moderate debt burden and a clean track record.

Credit Information Bureau

Introduction:
A Credit Information Bureau is an organization that collects and collates credit data on Borrowers from its member financial institutions. The financial data is then aggregated in system and the resulting information (in the form of credit reports) is made available on request to contributing member financial institutions for the purposes of credit assessment, credit scoring and credit risk management. The major purpose of this database is to enable the financial institutions to know the credit history of their prospective customers thus enabling them to make a more prudent decision.

History of CIB:
The Credit Information Bureau (CIB) is a public sector credit bureau of Pakistan. It was established in 1992 by the State Bank of Pakistan (SBP) under Section 25(A) of Banking Companies Ordinance-1962. The CIB is a part of Banking Surveillance Department of the State Bank of Pakistan.

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Role of CIB:
The CIB plays an important role in promoting financial discipline, better credit risk management and making prudent lending decisions. It is globally recognized that a well developed financial sector must have effective credit risk detection and management system to allocate credit efficiently. The CIB helps financial institutions in managing credit risk and assessing true credit worthiness of existing as well as prospective borrowers.

Confidentiality of information:
According to Banking Companies Ordinance, 1962 (BCO) the credit information is deemed as confidential and SBP while making such information available to its member financial institutions shall not disclose the names of institutions which are the original source of that information. At present only those banks and financial institutions, which are either regulated by Securities & Exchange Commission of Pakistan (SECP) or SBP are the members of eCIB database. The information in CIB database is currently being exchanged on reciprocity basis and every financial institution is required to submit its entire borrower records irrespective of any limit to the CIB database. The member financial institutions can only access limited information from CIB database for assessing credit worthiness of borrower. Disclosure to third party is strictly prohibited under the law. Thus individuals and corporate entities are not entitled to obtain their credit information reports.

Two types of reports can be generated from eCIB system: 1. Consumer Credit Information Report 2. Corporate Credit Information Reports

1. Consumer Credit Information Report: All individuals and sole proprietors are placed under the category of Consumer Borrower and are reported against their unique identification codes (Computerized National Identity Card Numbers (CNIC) and Old National Identity Card Numbers where CNIC numbers are not available with financial institutions). The system also has the provision for consumer credit and default history for the last 12 months.

2.Corporate Credit Information Reports: Partnership concerns and corporate entities (both listed and unlisted) are categorized under Corporate Borrower. The system provides unique borrower code to each entity/concern.
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Member financial institutions are required to report all financial obligations under unique borrower code assigned to each entity/concern. The corporate credit information report contains details of outstanding liabilities (fund and non- fund based), position of over dues, details of litigation, write-offs, recoveries and rescheduling and restructuring.

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Recommendations

As the number of complaints of misuse cards increased, PIN-based credit cards should be issued that would provide additional security.

Markup charged on consumer financing should be reduced to a substantial level so the spread between bank loans and deposit could be reduced and customer could easily pay off the loans Better returns should be provided on deposit accounts

To facilitate the customers new products and services should be introduced continuously SBP should continuously update its regulations according to need of people and economic situations of the country Increase consumer awareness, give clear instructions and guidance Make customer friendly policies but it should also cover the risk factor

Markup charge on loans & interest given on deposits should be regularly monitored and guided by SBP.

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