Presentation - Overview of Bank Audit

1
Training Workshop on
Audit of Banks

Roadmap for Audit
of Banks
Training for BOP
Strategy and Operations

Audit Of A Bank– Basic Concepts
 An audit of a bank is different from a conventional audit mainly for the
following two reasons: -
 The Nature of business is altogether different from any other sector.
Money is the raw material and money is the finished good.
 It is a highly regulated sector of the economy. The Central Bank of our
country i.e. the State Bank of Pakistan established policies and
procedures in the form of regulatory and operational requirements and
require strict compliance to these.
The assets and liabilities of a bank are arranged on the face
of balance sheet in descending order of their liquidity.
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Major Areas of Branch Audit
1. Advances / Loans / Credits / Risk Assets
Facilities.
2. Deposits
3. Operations / General / Retail /
Miscellaneous Banking

Loans / Credits / Advances / Risk Assets /
Facilities
• Bank lending i.e. loans and advances, usually represent the largest
class of asset in a bank balance sheet. It is also a bank's greatest
source of exposure to loss, and this necessitates a high degree of
internal control.
• Loans are granted by a bank’s branch to its clients and these are
generally funded by borrowing money at KIBOR (Karachi Inter-Bank
Offered Rate). The branch then charges its client markup at a rate
higher than KIBOR to generate a profit on the interest rate
differential (called SPREAD). Therefore, nowadays almost all loans
are priced with KIBOR as their base.
 Throughout this booklet the term KIBOR is used. All countries have their own inter-
bank base rate at which all banks are willing to accept deposits from each other. For
the purposes of this booklet all funds are considered to be borrowed and lent at
KIBOR but in practice it could be at any rate.
6

Classification of Loans / Credits / Advances /
Facilities
Loans/Facilities can be broadly divided in two categories
a. Funded Facilities
• A funded facility is one in which actual funds are credited/disbursed to the borrower’s
account and default risk is born by the bank.
• Examples:
• Running Finance
• Term Finance
• Bridge Finance
a. Non-Funded Facilities
In case of a non-funded facility the bank only assumes a financial obligation on behalf of the
customer towards a third party in the event of default by the customer.
• Examples:
• Letter of Credit
• Letter of Guarantee
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Types of Advances
• Overdrafts / Running Finance
• Cash Finance
• Term Credit Facilities
– Term Finance
– Syndicated Loans
– Bridge Finance
– Demand Finance
• Payment against documents (PAD)
• Finance against imported merchandise (FIM)
• Finance against Trust Receipts (FATR)
• Bills purchased / negotiated under LC
• SBP export refinance
• Pre Shipment Export Finance (FAPC-I, FAPC-II, FAPC-G)
• Consortium / Syndicated financing

Running Finance
• Also called roll over facility or revolving credit.
• It is the form of lending, where customer is allowed to borrow money from a
banker up to a certain limit either at once or as and when it is required. If it
is availed and withdrawn at different intervals and paid back on various
occasions, then the mark up levied thereon is worked out on daily product
basis. The formula to work out mark up on "daily product basis", in respect
of Running Finance, according to recognized Banking practice is:
• 'Balance Outstanding X Number of days X Rate 365 days in a
calendar year“.
• The mark up in running finance facility, is a revolving credit. It renews until
exhaustion of amount of credit, the customer has the facility to draw it again
when limit is reached. Credit is automatically reinstated after each drawing,
within the limit. The limit is renewable credit, until it's full utilization.
9

Cash Finance
This facility is generally provided against pledge
of goods. Under this type of financial
accommodation the facility amount is disbursed
in specially opened account for the purpose. The
pledged goods are released to the borrower
against cash payment only. In case the goods
pledged are seasonal in nature, the customer
would be required to adjust the facility before the
season ends. Rollover shall not be allowed.
10

Audit Procedure on RF & CF
• Obtain the 303014 report (complete facility
ledger report) and check the date of Sanctioning
of Loan that should not be more than 1 yr old.
Then in 303014 check the Limit Sanctioned and
the Drawing power and compare it with the
Outstanding amount. Conduct Loan evaluation
of selected parties of the branch.
11

Term Finance
These are made for a fixed period of time and can be
repayable either in installments or in full at the maturity
date. A short term loan is generally regarded as being a
loan which is repayable within one year from when it is
granted. A medium term loan is generally regarded as
being repayable after at least one year but before the
expiry of five years. A long term loan is generally
regarded as one that is not finally repayable until at least
five years after it was granted. The interest rate is
normally predetermined for short term loans and is likely
to be of a floating nature for medium to long term loans
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Term Credit Facilities - Policy
All Credit Facilities approved for periods over one year with a fixed
repayment schedule are defined as term credit facilities.
a) Tenor
Tenor should not exceed seven years, including grace period, from the date
of commitment to the date of final maturity. Exception to it may be allowed
where facility is being extended under any special scheme approved by the
Government.
b) Amortization
Principle must be amortized through regular installments, preferably
quarterly, but not less frequently than semi-annually, starting from the date
of final takedown. A grace period of up to two years may be allowed before
beginning repayment, but in all cases this grace period must be justified by
the circumstances of the particular financing.
c) Mark-up Frequency
Mark-up should preferably be paid monthly, but not greater than quarterly,
starting from the date of initial takedown. The relevant approving authority
may, allow exception where sound business and credit grounds exist.
13

Audit Procedures – Term Credit Facilities
• Take 303014 report and compare expiry date with the year end
date. If the expiry date is after the year end date then the party is
regular as far as the principle is concerned.
• But if the expiry date of the principle of the facility is before the year
end then check the facility for the classification.
• Prepare a predictive test on mark-up for the quarter by multiplying
the outstanding principal amount with the mark-up rate. Compare it
with the mark-up outstanding in 303014 report. If this markup
calculated is approximately half of the outstanding markup then
check that party for the classification.
14

Syndicated Loans / Consortium Financing
A syndicated loan is one that is provided jointly by a number of
banks or financial institutions (consortium of banks / financial
institutions) who would be individually either unwilling or unable to
provide funds in view of the size and nature of the funding.. These
banks or financial institutions are usually brought together by one or
possibly more managing banks which have organized and
negotiated the whole package. The managing (or sometime it's
called lead) bank handles the negotiations with the borrower,
perhaps the documentation, collects the funds from participants and
then disburses the full amount to the borrower. Subsequently the
managing bank is responsible for collecting all sums due from the
borrower (both principal and interest) and for passing their share of
these sums to the participants. Apart from the managing bank, the
syndicate participants do not have any direct dealing with the
borrower as all their information needs and any required action (e.g.
in case of default) is dealt with solely by the managing bank.
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Bridge Financing
Bridge financing is a way for companies, just before their
IPO, to obtain the cash they need to maintain operations
throughout the process. Usually the funds are supplied
by the investment bank who will, in turn, receive shares
of the company at a discount from the declared issue
price. This discount will typically offset the total amount
of the bridge loan .
The financing is basically a forward payment for the
future sale of the stock by the investment banker.
16

SBP Export Finance Scheme(EFS)
• In order to support export business in the economy SBP has provided a
facility to the exporters that they can packaging credit on a significantly low
rates, that finance is called FAPC (Finance Against Packaging Credit).
• SBP has recently changed the rate on these loans, in fact they have
increased the rates from 6.5% to 8% which is the base rate.
• Actually commercial banks give such loans to the exporters and then gets
the reimbursement/refinance from SBP. They add a spread up to 1% for the
services they charged so the rate charged from the exporters becomes
Base Rate+1%.
• There are actually two types of EFS, Part-I & Part-II
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EFS Part -I
• Financing under Part I of the Scheme is a transaction-based facility. The finance is
granted by the bank to the exporter on the basis of a Firm Export Order / Export
Letter of Credit, for a maximum period of 180 days. The financing facility can be
availed at pre-shipment stage for procuring inputs and manufacturing the goods to be
exported. Financing at Post Shipment stage is also granted against goods already
shipped to the importer abroad, for the period up-to realization of export proceeds or
180 days, whichever is earlier.
• After making a shipment the exporter prepare all relevant shipping documents and
evidence of shipment. The exporter contacts his bank to lodge the financing scheme
by providing following documents:
– Demand Promissory Note or DP Note on prescribed format
– Undertaking on Non-Judicial Stamp paper or Form B
– LC documentation
– Party request letter
– Form D
– Commercial Invoice
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EFS Part -II
• Under Part-II of the Scheme, a revolving finance limit is sanctioned to the exporter
equivalent to 50% of his export performance during the previous year on July - June
basis. Exporters can avail this financing facility for a period of 180 days. Facility once
availed needs to be repaid in totality. Exporters having availed Part-II facilities have to
export / ship eligible goods and realize export proceeds and submit the evidence of
performance on the prescribed statement within two months from close of each
financial year.
• Annual revolving limit based on half of the previous year export performance in
respect of eligible commodities.
• Available to Direct Exporters but not to Indirect Exporters.
• Monitoring of performance through EF-1 Statement.
– Duplicate of EE-I
– DP Note
– Undertaking
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Finance Against Packing Credit.(FAPC)
• Definition
– It is also called Pre-shipment Credit or Packing Credit.
– It is working capital finance provided by commercial banks to the
exporter prior to shipment of goods. The finance required to
meet various expenses before shipment of goods is called pre-
shipment finance or packing credit.
– It is a type of bank’s own source finance provided to clients
engaged in export trade. As the term packing indicates that the
credit line is granted to an exporter for the purpose of packing
merchandise for shipment to an importer abroad.
– An exporter should give documentary proof to the bank consist
of L/C in favor of exporter indicating the description of the
merchandise, the purchase price, date of delivery along with
other terms.
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Importance of FAPC
• To purchase raw material, and other inputs to manufacture goods.
• To assemble the goods in the case of merchant exporters.
• To store the goods in suitable warehouses till the goods are shipped.
• To pay for packing, marking and labeling of goods.
• To pay for pre-shipment inspection charges.
• To import or purchase from the domestic market heavy machinery and
other capital goods to produce export goods.
• To pay for consultancy services.
• To pay for export documentation expenses.
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FORMS OR METHODS OF PRE-SHIPMENT FINANCE
• Cash Packing Credit Loan
 In this type of credit, the bank normally grants packing credit advantage initially on unsecured basis.
Subsequently, the bank may ask for security.
• Advance Against Hypothecation
 Packing credit is given to process the goods for export. The advance is given against security and the
security remains in the possession of the exporter. The exporter is required to execute the hypothecation
deed in favor of the bank.
• Advance Against Pledge
 The bank provides packing credit against security. The security remains in the possession of the bank. On
collection of export proceeds, the bank makes necessary entries in the packing credit account of the
exporter.
• Advance Against Red L/C
 The Red L/C received from the importer authorizes the local bank to grant advances to exporter to meet
working capital requirements relating to processing of goods for exports. The issuing bank stands as a
guarantor for packing credit.
• Advance Against Back-To-Back L/C
 The merchant exporter who is in possession of the original L/C may request his bankers to issue Back-To-
Back L/C against the security of original L/C in favor of the sub-supplier. The sub-supplier thus gets the
Back-To-Bank L/C on the basis of which he can obtain packing credit.
• Advance Against Exports Through Export Houses
 Manufacturer, who exports through export houses or other agencies can obtain packing credit, provided
such manufacturer submits an undertaking from the export houses that they have not or will not avail of
packing credit against the same transaction.
• Advance Against Duty Draw Back (DBK)
 DBK means refund of customs duties paid on the import of raw materials, components, parts and packing
materials used in the export production. It also includes a refund of central excise duties paid on indigenous
materials. Banks offer pre-shipment as well as post-shipment advance against claims for DBK. 22

Finance Against Foreign Bills
(FAFB)
• It is a Post-Shipment facility, generally known
as Finance Against Foreign Bills (FAFB),
allowed to the exporters against their export bills
drawn under usance LC and/or Export Sales
Contracts. The facility so allowed remains on
customer risk till realisation of proceeds of that
particular Bill of Exchange.
• This advances is against foreign bill
covering bills of exchange, bills of lading, airway,
bills of exchange etc
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Audit Procedure on FAPC & FAFB
• Take report of FAPC and FAFB and compare the expiry
date with year end date. If the expiry date is before the
year end date then classify the facility and report in the
management letter both customer name and facility
number along with the amount classified for provisioning.
This facility is classified within 180 days of its lodgment.
• Also verify the total ledger balance with the Statement of
Affair. If the balance does not match report in the
management letter and inquire from the management.
24

Finance Against Trust Receipt (FATR)
This facility is mostly extended to Selective Corporate
customers against goods imported under a letter of
credit. The consignment is cleared by the importers from
customs, and stored under their controls in Trust for a
period as approved by the Bank. Financing against Trust
Receipt (FATR) by nature amounts to a “Hypothecation”,
allowing customers to retain the goods in trust and sell or
utilize the same and deposit corresponding value with
the Bank simultaneously to settle their outstanding.
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Payment Against Documents (PAD)
Import documents received under Sight LCs
are lodged in PAD, which are released on
payment from the party. If the party fails to
pay within 180 days of lodgment, the facility
will be classified as loss.
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Finances Against Imported
Merchandise (FIM)
Business organizations import variety of finished goods for own
manufacturing. Consumption of some items might be slow , which
hampers the importer’s liquidity quite often. To meet such
eventualities and to cover their Liquidity gaps, the businessmen
negotiate a financing facility with the Banks against pledge of the
imported merchandise known as “FIM”. Banks are required to
determine “Credit Cycle” for the facility, realistically assessing the
period when the customer shall be able to dispose off the
consignment and generate adequate Cash to settle outstanding
under FIM. Facility under FIM is provided on “Pledge” basis. The
Bank holds control over goods, through a middle person called “
Muccaddum”.
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Audit Procedures on PAD, FATR, FIM
Take the complete report of facility as at year
end, and compare the maturity date with the
year end date. If the maturity date falls before
the year end date, then that facility needs to be
classified to loss category as per the prescribed
criteria of SBP. Facilities are to be settled within
180 days of their lodgment date. All outstanding
facilities more than 180 days of their lodgment
are classified in the loss category.
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TRADE LOANS UNDER FE 25 OF 1998
 FE-25 is the Trade Loan facility for exporters and importers
Banks have been allowed to use/invest their deposits mobilized under FE 25
for financing of Import/Exports. Necessary guidelines by SBP on the subject
are as under:-
1. Exports (For financing pre-shipment, discounting/purchase of documents)
a. Trade loan facility under FE 25 scheme is entirely on self-liquidating basis from export
proceeds.
b. At the time of allowing the facility, the foreign exchange component of such facilities
should be surrendered to an Authorized Dealer at the buying rate.
2. Imports (Financing against Import Bills)
a. The facility for imports can be allowed only from the date of actual execution of import
payments in foreign currency by creating a foreign currency loan against the importer. The
maximum period of such loans should not exceed six(6) months from the date of
disbursement.
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Non-funded Facilities
 Letter of Credit
 Letter of Guarantee
 Bank Guarantee
30

Letter of Credit
A Letter of Credit (LC) is one of the most widely used modes of settling
international trade debts. It is also convenient and common method
of obtaining short term finances from the banks.
LCs are broadly classified as follows:
i) Sight Letters of Credit (DP)
In case of Sight LC, the draft is drawn at sight and the relevant
documents are held by the importing bank until retired (released) by
the customers.
ii) Usance Letters of Credit (DA)
In the case of Usance LCs, the draft is drawn for a certain period
(number of days) clearly mentioning in the LC, payable by the
customer on due date.
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Bank Guarantee (BG)
A Bank Guarantee is a guarantee issued by a bank
whereby the bank undertakes to pay the beneficiary
the agreed sum, if the bank’s customer fails or
defaults in fulfilling its obligations under the terms and
conditions of the contract with the beneficiary. All
Bank Guarantees must state the amount, purpose for
which the guarantee is issued, specific expiry date
and a specific claim period.
32

Audit Procedure – LCs, LGs
• Inquire all LC’s and acceptances
outstanding for more than one year.
• Ask management for the basis to keep
these as contingencies and commitments.
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PRUDENTIAL REGULATIONS
Prudential
Regulations
CORPORATE /
COMMERCIAL
CONSUMER
FINANCE
SMALL &
MEDIUM
ENTERPRISES
AGRICULTURE
FINANCE

Commercial loans in BOP
• CNG filling stations
• Auto lease financing scheme.
• Car Dealers
• Karobar barhao scheme.
• Fertilizer dealer financing scheme.
• Ali akbar group franchise financing scheme.
• Motorcycle dealer financing scheme.
• Financing scheme for the purchase of shop/office.
• Running Finance
• Demand Finance
• Cash finance
• Women's Entrepreneur Finance Scheme.
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Corporate Loans
• Working Capital Finance,
• Long Term/Demand Finance.
• Project Finance.
• Letter of Credit, Contracts and Export collection services.
• FE Loans, Pre and Post Shipment Export Financing etc.
• Import Financing.
• Bills Discounting.
• Letter of Guarantees.
• Cash Management Services
• Syndications and Consortium Financing.
36

Consumer / Retail Finance
• Asaish Loan
• Quick cash
• Car Lease
• House Loan
• Smart Cash Personal Loan
• Motorcycle Lease Scheme
• Caravan Fleet Financing
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Consumer Financing: is allowed to individuals for meeting
their personal, family or household needs.
Categories of facilities under consumer financing are as
follows:
– Credit cards: mean cards which allow a customer to
make payments on credit (corporate cards does not fall
in this category)
– Auto loans: means loan provided for the purchase of
vehicles
– Housing Finance: loan availed for the purchase or
improvement of residential house /apartment / land
– Personal loans: means loans to individuals for
payment of goods, services and expenses

SMEs
Small Medium Enterprises: means a company (ideally not a public limited
company), which fulfills following three conditions.
No. of Assets Excluding Net
Employees Land & Building Sales
•Manufacturing/service concern Up to 250 Upton R.100 M Rs.300M
•Trading concern Upton 50 Upton R.50 M Rs.300M
Note:
An individual , if he or she meets the above criteria can also be categorized as
SME.
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Potential errors and key risks in
loans and advances
The assertions / potential errors which are addressed through our
procedures at branch:
• Valuation
• Completeness
• Validity
• Recording
• Cut off
Following are the key risks that pertain to advances:
• Regulatory Risk- Non compliance of regulations of SBP while
sanctioning the loans
• Valuation- Improper classification of advances which leads to under
provisioning against impaired loan

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• Control Assurance Strategy – Maximum control
assurance
– Internal control questionnaire
• Substantive Procedures
– Audit program
– Legal Compliance checklist
– Working paper templates (Confirmation control
summary and test of details)
Review of work papers and
methodology for Lending cycle

Starting point for Advances
• In each branch, the first step is to obtain
the credit portfolio (list of creditors) party
wise and facility wise as at the balance
sheet date from management.
• The portfolio is to be matched with the
statement of affairs of each branch
(branch trial balance)
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• In branches, we have to thoroughly study the financing agreement
and account statement of each selected borrower to check that the
following items are in accordance with the agreement:-
– Total amount disbursed is within the sanctioned limit.
– Principal and interest is paid as per the agreed schedule.
– The required documentation is complete and properly authenticated.
• We have to check existence and genuineness of the following
documents:
– Facility offer letter (FOL) indicating all types of facilities provided to borrower and
their sanction limit and agreed terms and conditions.
– Credit Information Bureau (CIB) report of the borrower, that might depict any
default on account of the borrower or any of its group company(s). CIB report is
available from the Credit Information Bureau of State Bank of Pakistan.
– For corporate borrowers only, the board resolution relating to the concerned loan.
– Borrower’s Basic Fact Sheet (signed and stamped by the borrower) indicating
borrower’s particulars and borrower’s current status of funded and non funded
facilities.
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Approach to audit of advances
• Verify 80% of regular portfolio of branch on subjective & objective
basis and its compliance with Prudential Regulations.
• Verify 100% classified advances.

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Purpose of Credit Review Sheet
• It is the document which gives the complete detail for the selected
parties.
• To check the credit compliance (guidelines issued by SBP).
• It is a tool which gives the reviewer a complete picture of the party.
• It requires the branch manager to comment on the classification
proposed by us.

Extent of Verification
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The Bank of Punjab
Branch Name__________________
Audit for the year ended December 31, 2012
Extent of verification of advances
-
-
-
-
-
-
-
-
-
-
-
-
-
Regular Portfolio - Verified
- - - - - - - -
Regular Portfolio - As per Branch
Regular Portfolio - Extent Verified 0% 0% 0% 0% 0% 0% 0% 0.00%
Classified Portfolio - Verified
Classified Portfolio - As per Branch
Classified Portfolio - Extent Verified 0% 0% 0% 0% 0% 0% 0% 0%
Total Portfolio - Verified - - - - - - - -
Total Porfolio - As per Branch - - - - - - - -
Total Porfolio - Extent Verified 0% 0% 0% 0% 0% 0% 0% 0%
Running
Finance/Cash
Finance
Demand Finance Export refinance FIM
Payment Against
Documents
Own
Acceptance
Payment
S.No. Borrowers Ref.
---------------------------------------------------------- OUTSTANDING BALANCES AS AT December, 2012 ------------------------------
Funded Facilities
--------------------------------------------------------------------------------------- Rupees in 000 ------------------------------------------------------
TOD Total Funded
CLASSIFIED PORTFOLIO
TOTAL PORTFOLIO
REGULAR PORTFOLIO

General Considerations
• If one party is select for one advance or facility, then all
the facilities should be verified availed by the party.
• Each and every field is required to be filled, or write
sufficient explanation for fields not completely filled.
• All sheets are to be signed-off by the respective branch
seniors.
• Cross refer the sheets where marked.
• Attach the working of markup calculation and trace few
receipts in bank statements along with receipts of
principal.
• For each exception, refer to ICM
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CHECK LIST FOR DOCUMENTS TO BEREVIEWED
DOCUMENTS Compliance Y/N
Value
(if applicable)
Date of CA
Date of documents
(Should be date prior
to CA in most cases)
Authorization
Common Documentation for All Facilities
Credit Approval (Latest)
Facility Offer Letter (latest)
Disbursement Authorization Certificate
Financing Agreement (F-65)
Demand Promissory Note (F-49)
Letter of Arrangements (F-48)
Letter of Authority
SBP Undertaking
Legal Opinion on Documentation (Mention name)
Personal Guarantees (F-68): (Mention Guarantor’s name)
Running Finance
Letter of Hypothecation (F-54)
Memorandum of Deposit of Title Deeds
Letter of Continuity (F-53)
Letter of Lien (F-57 & 58)
Agreement for Sale & Buy back of Marketable Securities
Evidence of noting mutation of Bank’s Mortgage charge in concerned Revenue
Record
Undertaking signed by the borrower that Dividend warrant, bonus shares or other
benefits shall be passed over to the Bank
Cash Finance
Letter of Pledge (F-56)
Letter of Continuity (F-53)
Demand Finance
Letter of Installments (F-55)
Evidence of noting mutation of Bank’s Mortgage charge in concerned Revenue
Record
Registered Mortgage Deed.
In case of Equitable Mortgage:
Title Deed of Property
Non-Encumbrance Certificate
Irrevocable General Power of Attorney
Memorandum of Deposit of Title Deeds
NOC issued to other banks (if any)
Documentation for Commercial Lease
Asset Lease Agreement Signed By:
§ Borrower
§ Authorized Representative of Bank
§ Two other 3 rd
party witnesses
Application for the Creation of Charge Signed and stamped by:
Branch Manager
Certificate of Creation of Charge
Signed and stamped by:
§ Branch Manager
Others (Specify)
In case of Companies:
Board Resolution
Search Report
Certificate of Registration Of Mortgages and charges
Copy of ID card of authorized signatories and specimen signatures
Memorandum & Articles of Association
(Especially for borrowing powers, power to charge its assets, issuance of guarantee etc)

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THE BANK OF PUNJAB
MAIN BRANCH
AUDIT FOR THE YEAR ENDED DECEMBER 31, 2012
BORROWER'S NAME / GROUP NAME
LEGAL STATUS:
BUSINESS:
BREIF DESCRIPTION
FUND BASED EXPOSURE Rupees in '000
As per
Bank
Return
As per
MYASCo
PRINCIPAL MARK-UP TOTAL
Total Funded Exposure - - -
NON - FUND BASED EXPOSURE Rupees in '000
As per
Bank
Return
As per
MYASCo
Total Non - Funded Exposure - - -
Grand Total - - -
Compliance of Exposure Limits (PR-1)
%
Amount (Rs.
‘000)
Single Borrower
Total
(Funded and
Non
Funded)
30 % of
Bank’s equity
1,653,586
Funded
20 % of
Bank’s equity
1.102,391
Group
Total
(Funded and
Non
Funded)
30 % of
Bank’s equity
2,480,379
Funded
25 % of
Bank’s equity
1,929,184
Equity of the bank as per audited accounts as at 31 December 2008 is Rs. 5,511,953 (‘000’)
If the exposure is above than the prescribed limits as mentioned above, check the exposure as per annexure I of the PR for
Borrower
Nature of
Exposure
Maximum Limit as per PR-1
Compliance Excess
NATURE OF FACILITY
CLASSIFICATION
OUTSTANDING AS AT DECEMBER 31, 2012
NATURE OF FACILITY
CLASSIFICATION OUTSTANDING
AS AT
DECEMBER 31,
2012
COMMISSIO
N INCOME
TOTAL

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*THE BANK OF PUNJAB
BRANCH NAME:
VERIFICATION SHEET OF LOAN / ADVANCE
FOR EACH CLASS OF LOAN OF EACH BORROWER
YEAR ENDED: DECEMBER 31, 2012
Borrower Date of Disbursement
Nature of Finance Term of Repayment
Approval WP Ref:
(i) Number Grace Period
(ii) Date Rate of Markup/Interest
(iii) Limit
Last Payment Principal Markup Principal
(iv) Expiry date (i) Due on
(ii) Received on date
(v) Reschedule (iii) Amount
(iv) Overdue days
(vi) Nature of Security
Date Amount Rs. Amount Rs. Period Bank Amount Rs. Period
Approved By
(Checked as per Limits)
1 2 3 4=1+2+3 5 6 7 8=1-7 9 10 11
Job Incharge Conclusion (on the basis of evaluation tick whichever is applicable)
Satisfactory
Doubtful of
recovery
Security Shortfall Excess over limit
Defective
Documentation
Defaults in CIB
Irregular
Repayments
Negative Financial
Indications
Dec
31,
2012
* NOTE: Banks have to determine the margin over KIBOR at transaction date; however, once the margin is agreed with the customer, bank should not
increase it, during the tenor of the loan. For additional consideration please see attached annexure-Note 1.
Category of Classification
Instalment
Overdue By
Provision of
Principal less
value of
securities
Short /
(Excess)
OUTSTANDING BALANCE CLASSIFICATION
Value of
Securities
(A)
Principal Less
value of Security
SPECIFIC PROVISION FOR PRINCIPAL
Principal
Markup/
interest
(receivable
Account)
Markup/
interest
(Suspense
Account)
Total
As Per Bank
Return
Recommend
ed by DTTL
As Per Bank
Return
As Per DTTL
Regular Loan Rs. Overdue Loan Group default Loan
As per Original Sanction As per Rescheduling A
------- 30-Sept-2012 ------- ------- 31-Dec-2012
CIB Report

51
The BankofPunjab
BranchName:
AnnualAuditorthe YearendedDecember31,2012 Preparedby:
TestofDetailsonLetterofCredit Reviewedby:
Rupeesin'000
S.No. TypeofL/C L/CNo. L/CAmount
Nature of
Letterof
Credit
Date of
opening
Checked
ApprovalofL/C
Checked
entryinLC
register
Amountof
marginwithheld
Amountof
Commission
Commissionis
asperSchedule
ofCharges
1
IMPORTL/Cs

52
The Bank ofPunjab
BranchName:
Annualauditforthe yearendedDecember31,2012 Preparedby:
TestofDetailonLetterofGuarantee Reviewedby:
Rupeesin'000
S.No.
Type of
L/G
L/GNo.
Amountof
LG
Date of
Opening
Checked
Approvalof
L/G
Checked
entryinLG
Register
CheckedGuarantees
are withincustomer
approvedcreditlimits
(as persanction
advice)
Amountof
Margin
Withheld
Commission
Ensure thatmargin
is releasedon
expiry
/cancellationof
Guarantees
1
2
InlandL/G

53
Name:
Year:
WP Reference #
30-June-2012
(Audited)
30-June-2011
(Audited)
Revenue (a) -
G.P. (b) -
Profit / (Loss) after Tax (c)
Shareholders equity (excluding revaluation reserves) (d)
Retained Earnings / (losses) (e)
Revaluation Reserves (for last three years only) * (f) - -
Sub-ordinated Loans (Loans from directors/ associates) (g) -
Total Equity of Borrowers (h = d + e + f + g) - -
Long-term Debt & Finance Lease liability (i)
Add: Current maturities -
Total long term liabilities (k = i + j) - -
Short-term borrowings (l)
Total fund based exposure (m = k + l) - -
Debt to equity ratio (n = k / k + h) #DIV/0! #DIV/0!
Current Assets (o)
Current Liabilities (p)
Current Ratio (q = o / p) #DIV/0! #DIV/0!
Current Assets less inventories, spares and prepayments (r)
Quick ratio (s = r / p) #DIV/0! #DIV/0!
EBITDA (t) 2,685 3,304
Finance Costs (u)
Interest Cover (v) #DIV/0! #DIV/0!
Cash Flows: (not in PRs needed to be checked whether it is included in bank’s credit policy)
Cash Flow from Operating Activities:
Cash Flow from Investing Activities:
Cash Flow from financing Activities:
Net Cash Inflow / Outflow:
CONTINGENCIES:
Borrowings from Banks / Financial Institutions
- Fund Based exposure (w = m) - -
- Non-fund based (commitments) (x)
Total Borrowings (y = w + x) - -
Ten Times of Equity (z = h x 10) - -
Cushion / (Excess) ( z – y ) - -
Four times of equity (aa = h x 4) - -
Cushion / (Excess) (aa – w) - -
i. Name of Auditors:
ii.Auditor’s Opinion: Clean / Modified / Going Concern inappropriate?
iii.Brief Description of Modification, if any:
COMMENTS:
RUPEES IN ‘000’
Ideal interest cover is 3 times. One or lower cover is not a healthy sign, it should be discussed with Credit Manger and reported to
management letter if not justified.
If cash flow from operating / investing activities is negative, discuss the matter with credit manger and report the same in ML if
satisfactory explanation is not provided.

54
The Bank of Punjab
Main Branch
Security Review Checklist
Audit for the year ended December 31, 2012
Pledge of Shares / Securities:
1. Amount of securities as per Credit Approval : Rs. ………………………………………………
Gurantee???
2. Value as at December 31, 2012:
Y/N Y/N
Total (A)
Less: Margin (R-6)
30 % of the value calculated above in
case of shares
10% if TFCs are rated A or above
20% if TFCs are rated A- and BBB
Drawing Power
Yes No
Only shares in CDC are considered as security.
3. Value during the period:
A B C D E=(C-D)
Example: Monthly 31-Jan-12 1M 1.5 M (0.5M) Y
4. Physical Verification:
Any difference as per records CDC statement: __________________
Are the CDC statements showing “pledge” status of these shares? Y/N
REGISTERED / EQUITABLE MORTGAGE/PARI-PASSSU CHARGE:
Description & Location of Property (Only Residential, Industrial and Commercial Property, will not include Agricultural Land and Property)
Property Location
1
2
3
4
(Rs.)
The bank has to monitor margin on at least weekly basis and will take appropriate action for top-up or sell-out
on the basis of their board of directors approved credit policy and pre written authorization from the borrower
Compliance
Frequency of receipt of
shareholding reports (Usually
monthly reports)
Date of Report (Usually each
month end Fill the column for
whole year )
Market Value
of Shares
Outstanding
Principal at the
date of report of
shareholding
(Shortfall)/Excess
Shortfall
reported to
ML
Description
Shares kept
in CDC
Shares / Securities Issued by Listed Quantity Closing Rate Market Value

55
Rupees in '000
A. Liquid Securities WP Reference Yes / No Date
- Bank deposits - A. PRIMARY SECURITIES
- Deposit certificates - Original Deposit certificates
- Government securities - Share certificates / Government Securities
- Shares of listed companies - Letter of pledge / Lien (IB-26)
- NIT units - Stock Report (in case of pledge)
- Mutual fund certificates -
- Inventories pledged to the B. SECONDRY SECURITIES
bank with perfected lien - Primary Documents
- Bank Guarantees from Legal Opinion
Bank - Sale/Conveyance/Gift Deed
Less: Margin (R-6) in case of pledge of shares Lease Deed
30 % of the value calculated above in case of shares Search Certificate / NEC
10 % if TFCs are rated A or above Mortgage Deed
20 % if TFCs are rated A- and BBB Permission to Mortgage
Drawing power Power of Attorney
Total liquid securities Valuation Report By An Approved Valuer
In case of Equitable Mortgage
Memorandum of Deposit of Title Deed (IB-24)
In case of Registered Mortgage
B. Primary Securities Registered Mortgaged Deed (IB-22)
Pledge In case of Charge on Fixed Assets of Companies
Hypothecation Charge Registration Certificate
Others ________________ -
Total Primary securities -
C. Collateral Securities
__________________ -
__________________ -
Total Collateral Securities -
Total ( A + B + C ) -
Secondary documents
Propotionate Share in Syndicate Security Articles of Asociation / Memorandum of Association
Hypothecation Agreement
Total syndicate loan amount Mutation Letter (Transfer)
Loan share of BOP Approved Construction Plan
Property tax challan
Total value of charge 0 Stock Report (in case of hypo stock)
Insurance Cover - Pledge
Share of BOP in security #DIV/0! Insurance Cover - Hypothecation
Charge Forms
Demand Promissory Note (IB-12)
Markup Agreement (IB-6)
Personal Guarantee (IB-29)
TOTAL VALUE OF SECURITIES SECURITIES DOCUMENTS CHECKLIST
Remar

56
Yes/ No/ N/A Remarks
A PRUDENTIAL REGULATIONS REGARDING EXPOSURE
R4
Exception – Export finance scheme shall be exempt from per party limit.
R1
R1
Check that where the equity of a borrower is negative and the borrower has injected
fresh equity during its current accounting year, it will be eligible to obtain finance
up to 3 times of the fresh injected equity provided the borrower shall plough back
at least 80% of the net profit each year until such time that it is able to borrow
without this relaxation.
R5
5. Ensure that total exposure (both funded and non-funded) does not exceeds with 10
times of total equity of borrower subject to fund based exposure not exceeding 4
times of borrower's equity as disclosed in financial statements.
R5
6.
a). Practicing Chartered Accountant, relating to the business of every borrower who is
a limited company or where the exposure of a bank exceeds Rs 10 million, for
analysis and record.
R3
b). Accept a copy of financial statements duly audited by a practicing Cost and
Management Accountant in case of a borrower other than a public company or a
private company which is a subsidiary of a public company.
R3
c). Financial statements signed by the borrower will suffice where the exposure is fully
secured by liquid as sets.
R3
d). If the borrower is a public limited company and exposure exceeds Rs. 500 million,
banks/DFIs should obtain the financial statements duly audited by a firm of
Chartered Accountants which has received satisfactory rating under the Quality
Control Review (QCR) Program of the Institute of Chartered Accountants of
Pakistan.
R3
R3
R3
B. SPECIFIC PROVISION OF PRINCIPAL
1.
C. INTEREST / MARKUP
1. Ensure that rates of interest / markup are in accordance with the loan agreements.
Ensure that only those liquid assets are deducted from the outstanding balance of
principal for calculation of specific provision which are readily convertible into cash
without recourse to the court of law under perfected lien with bank duly supported
with flawless documents.
8 Check that CIB report obtained while cons idering proposals for taking any
exposure exceeding Rs.500,000 after netting off the liquid assets held by bank as
security.
4.
Check that the Bank may obtain a copy of financial statements from borrower as
under:-
7. Banks 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 is accompanied by a ‘Borrower’s
Basic Fact Sheet’ under the seal and signature of the borrower.
2. Check that total outstanding fund and non fund based exposure to single person
shall not exceed 30% of bank equity provided maximum outstanding fund based
exposure does not exceed 20% of bank equity subject to conditions.
3. Check that total outstanding fund and non fund based exposure to group shall not
exceed 30% of bank equity provided maximum outstanding fund based exposure
does not exceed 25% of bank equity subject to conditions.
THE BANK OF PUNJAB
ANNUAL AUDIT FOR THE YEAR ENDED DECEMBER 31, 2012
BRANCH……………………
PRUDENTIAL REGULATIONS REVIEW CHECLKLIST
1. Check that Bank does not provide unsecured advance above Rs.500,000/- to any
single borrower.

Documents to be Reviewed
57
Approval Limits pe r party for all facilitie s (Funde d & None Funde d)
Approval
Limits
(million)
1 Country Cre dit Committe e
Committee will comprise of following
Executives
Chairman:
President of the Bank shall be the Chairman
of the Committee.
M e mbe rs :
a. Deputy Chief Executive Officer
b. Chief Risk Officer (CRMD)
c. Country Corporate Head (C&IBG)
Term of Reference:
Approval/restructuring/reschedule all types of finances over and above. 350
2 Corporate Banking Cre dit Committe e
Executives
Chairman:
Deputy Chief Executive Officer
M e mbe rs :
a. Chief Risk Officer (CRMD)
b. Country Corporate Head (C&IBG)
Term of Reference:
Approval/restructuring/reschedule all types
of finances from 150 to 350
3 Corporate Banking Cre dit Committe e -Re gional
Executives
Chairman:
Deputy Chief Executive Officer
M e mbe rs :
a. Regional Corporate Head
b. Representative of the Credit Risk Management
Term of Reference:
Approval/restructuring/reschedule all types
of finances up to 150
Approval Limits Complie d Ye s ----------------------
No-----------------------
STRUCTURE
The following Committees will invariably consider every aspect of lending business within
jurisdiction/amount defined including but not restricted to approvals, restructuring, waivers and approval
for suit filing.

58
Important definition of PR-Corporate
Exposures
means financing facilities whether fund based and / or non fund based and
include:
• Any form of financing facility extended or bills purchased/ discounted
except ones drawn against the L/Cs of banks rated at least ‘A’ by credit
rating agency on the approved panel of State Bank of Pakistan and duly
accepted by such L/C issuing banks;
• Any financing facility extended or bills purchased/ discounted on the
guarantee of the person;
• Subscription to or investment in
– shares,
– Participation Term Certificates,
– Term Finance Certificates or
– any other Commercial Paper by whatever name called (at book value) issued or
guaranteed by the persons;
• Credit facilities extended through corporate cards;
• Any financing obligation undertaken on behalf of the person under a letter
of credit;
• Loan repayment financial guarantees;
• Any obligations undertaken on behalf of the person under any other
guarantees including underwriting commitments;
• Acceptance/endorsements made on account;
• Any other liability assumed on behalf of the client to advance funds
pursuant to a contractual commitment.

59
Equity of bank
Means tier-I capital or core capital and includes
• paid-up capital,
• general reserves * ,
• balance in share premium account,
• reserve for issue of bonus shares,
• retained earnings / accumulated losses as disclosed in
latest annual audited financial statements.
* Reserve shall include revaluation reserve on account of
fixed assets to the extent of 50% of their value.

60
Equity of borrower
includes
• paid-up capital,
• general reserves,
• balance in share premium account,
• reserve for issue of bonus shares and retained earnings /
accumulated losses,
• revaluation reserves on account of fixed assets *,
• subordinated loans and
• Preference shares.
* ‘Revaluation reserves will be part of equity for first three years
only from the date of revaluation’

61
Liquid assets
• assets which are which are readily convertible into cash without recourse to
a court of law
• mean encashment / realizable value of government securities, bank
deposits, certificates of deposit, shares of listed companies which are
actively traded on the stock exchange, NIT Units, certificates of mutual
funds, Certificates of Investment (COIs) issued by DFIs / NBFCs rated at
least ‘A’ by a credit rating agency on the approved panel of State Bank of
Pakistan
• Listed TFCs rated at least ‘A’ by a credit rating agency on the approved
panel of State Bank of Pakistan; and
• Certificates of asset management companies for which there is a book
maker quoting daily offer and bid rates and there is active secondary market
trading.
• These assets with appropriate margins should be in possession of the
banks / DFIs with perfected lien.
• Guarantees issued by domestic banks / DFIs when received as collateral by
banks / DFIs will be treated at par with liquid assets
• The inter-branch indemnity / guarantee issued by the bank’s overseas
branch in favor of its sister branch in Pakistan, would also be treated at par
with liquid assets

62
Important Regulation on PR
Regulation-1 Limit on exposure to single person
• Total (funded and non-funded) exposure of up to 30% of the bank’s
equity,
• Fund based exposure of up to maximum of 20% of the bank’s
equity.
Regulation-1 Limit on exposure to group
• Total (funded and non-funded) exposure of up to 45% of the bank’s
equity to the group,
• Fund based exposure of up to maximum of 35% of the bank’s equity
to the group.

63
Effective date
Exposure limit as a % of bank’s/ DFI’s equity (as disclosed in the
latest audited financial statements)
For single person For group
Total outstanding
(fund and non-
fund based)
exposure limit
Fund based
outstanding limit
Total outstanding
(fund and non-
fund based)
exposure limit
Fund based
outstanding limit
31-12-2009 30 20 45 35
31-12-2010 30 20 40 35
31-12-2011 30 20 35 30
31-12-2012 30 20 30 25
31-12-2013 25 25 25 25
REGULATION R-1
LIMIT ON EXPOSURE TO A SINGLE PERSON/GROUP

64
For the purpose of calculating exposure limit banks/DFI’s are
required to follow these guidelines.
A) 100% of the deposits placed with lending bank / DFI, under perfected lien and in the
same currency, as that of the loan, shall be excluded.
B) 90% of the following shall be deducted;
(i) deposits placed with the lending bank/DFI, under perfected lien, in a currency
other than that of the loan;
(ii) deposits with another bank / DFI under perfected lien;
(iii) encashment value of FIBs, PIBs, Treasury Bills and National Saving Scheme
securities, lodged by the borrower as collateral; and
(iv) Pak. Rupee equivalent of face value of Special US Dollar Bonds converted at
inter-bank rate, lodged by the borrower as collateral.
C) 85% of the unconditional financial guarantees accepted as collateral and payable on
demand by banks / DFIs, rated at least ‘A’ or equivalent by a credit rating agency on
the approved panel of SBP.
D) 50% of listed TFCs held as security with duly marked lien shall be deducted. The
TFCs to qualify for this purpose should have been rated at least ‘A’ or equivalent by a
credit rating agency on the approved panel of SBP.
E) Weight age of 50% shall be given to;
(i) documentary credits (except Standby Letter of Credits where 100% exposure
would be counted) opened by banks / DFIs;
(ii) guarantees / bonds other than financial guarantees;
(iii) underwriting commitments.

65
For the purpose of calculating exposure limit, following
should not be included:
• Loans and advances (including bills purchased and
discounted) given to the Federal Government.
• Obligations under LCs and LGs to the extent of cash margin
held by the bank / DFI.
• LCs opened on behalf of Federal Government where
payment is guaranteed by SBP / Federal Government.
• Facilities provided to commercial banks / DFIs through
REPO transactions with underlying Statutory Liquidity
Requirements (SLR) eligible securities.
• Pre-shipment / post-shipment credit provided to finance
exports of goods covered by LCs / firm contracts including
financing provided from the bank’s / DFI’s own resources.
• Letters of credit established for the import of plant and
machinery.

66
Regulation-3 Minimum conditions for taking exposure
For taking exposure against regular parties
Obtain Credit Information Bureau (CIB) report while considering
proposals for taking any exposure exceeding Rs.500,000 after netting
off the liquid assets held by bank as security
For taking exposure against defaulters
Banks may take exposure on defaulters keeping in view their;
 Risk management policies and
 Criteria.
The bank should properly record reasons and justifications in the
approval form.

67
Regulation-4 Limit on exposure against
unsecured financing facilities
Per party limit for clean financing
• Clean facilities
All facilities without any securities and against personal
guarantees.
• Limit
Clean facilities provided to any one person shall not exceed
Rs.500,000.
• Condition for granting clean facilities
At the time of granting a clean facility, banks shall obtain
a written declaration

68
Following shall be excluded / exempted from
the per party limit of Rs.500,000 on clean
facilities:
• Facilities provided to finance the export of commodities eligible
under Export Finance Scheme.
• Financing covered by the guarantee of Pakistan Export Finance
Guarantee Agency.
• Loans / advances given to the employees of the banks / DFIs in
accordance with their entitlement / staff loan policy.
• Investment in COIs / inter bank placements with NBFCs, provided
the investee NBFC is rated ‘A+’, ‘A’ or ‘A-’ for long-term rating
and at least ‘A2’ for short-term rating or equivalent by a credit
rating agency on the approved panel of the State Bank of Pakistan

69
Requirements as to obtain/file Financial Statements
The bank should obtain a copy of Financial Statements duly audited
by:
• a practicing Chartered Accountant in the following cases
• A limited Company and / or
• Where the exposure of the bank exceeds Rs.10m.
• a practicing Cost and Management Accountant in case of:
• a borrower other than a public company or
• a private company which is a subsidiary of a public company
• This condition may be waive where exposure net off liquid assets
does not exceed Rs.10 million.
• Financial statement signed by the borrower will suffice where
exposure is fully secured by liquid assets.

70
Regulation-5 Linkage Between Financial
Indicators of the Borrower and total exposure
from Financial Institutions
Limit on exposure of the borrower
• Where the equity of the borrower is positive
• Total exposure 10 times of borrower’s equity
• Fund based exposure 4 times of the borrower’s equity.
• Where the equity of the borrower is negative and he has
injected fresh equity during current year;
• Not exceeding 3 times of the fresh injected equity.
Provided the borrower shall plough back (not to distribute to the
members) at least 80% of the net profit each year.

71
Exceptions
Banks may allow seasonal financing to borrowers, for a maximum
period of six months;
• Fund based exposure does not exceed 8 times
• Total exposure does not exceed 12 times of borrower’s equity
NBFC
• Fund based exposure does not exceed 4 times
• Total exposure does not exceed 10 times of borrower’s equity.
Current Ratio of Borrower
Fresh exposure or enhancement in the running exposure or renewal
of the existing exposure, current ratio of the borrower shall not be
lower than 1:1.
Relaxation in the current ratio of Borrower
Banks may relax this ratio upto 0.75:1

72
Regulation-8. Classification and
provisioning for assets loans / advances
Classification of asset portfolio and provisioning there
against – Time Based Criteria
Classification Determinant Treatment of
Income
Provision to be
made on
principal net off
liquid
securities and *
40% of FSV
1.Sub –
standard
Mark up/interest or Principal amount overdue
by 90 days or more from the due date.
As above. Provision of
25%.
2. Doubtful Mark up/interest or Principal amount overdue
by 180 days or more from the due date.
50%.
3. Loss a. Where mark-up/ interest or Principal is
overdue beyond one year or more from the
due date.
b. Where Trade Bills (Import/ Export or Inland
Bills) are not paid/ adjusted within 180 days
of the due date.
100%.
Exemptions from classification of assets portfolio and provisioning their against
Classified loans / advances that have been guaranteed by the Government, however, markup / interest on
such accounts shall be taken to suspense account instead of income account

73
* Forced Sales Value (FSV)
• FSV means value which can currently be obtained by selling the
mortgaged / pledged assets in a forced / distressed sale
conditions.
• Banks are allowed to take the benefit of 40% of FSV of pledged
stocks, mortgaged commercial and residential properties and
industrial land and buildings held as collateral against all NPLs for
three years from the date of classification for calculating
provisioning requirement.
• The FSV benefit shall be available only on liquid assets, pledged
stock, residential & commercial property and industrial land and
buildings having registered or equitable mortgage and/or having
pari-passu charge shall be considered on proportionate basis of
outstanding amount.
• Exceptions: Hypothecated assets, plant and machinery or assets
with second charge shall not be available for benefit.

74
Subjective Basis
In this case classification is made after considering the following
factors:
• Creditworthiness of the borrower is not sound (For e.g. CIB report shows
overdue)
• Borrower has cash flow problems.
• Very nominal movement in account especially in respect of cash deposit.
• Security is not adequate.
• Documentation of security is incomplete / defective.
• Borrowers current ratio is less than 1:1 (in exceptional cases banks may
accept the current ratio 0.75:1)
• Personal Guarantee of directors duly approved by their BOD of private
limited company has not obtained.
• Facility provided Excess or over the limit.
Note
Post mortgage legal opinion:
Post mortgage legal opinion is the opinion after creation of effective
mortgage.
Pre mortgage legal opinion:
Pre mortgage legal opinion is the opinion that effective mortgage can be
created. Ensure that legal documentation mentioned by advocate has been
obtained by branch.

Banks generally maintain a margin (cushion) between the sale value of securities and
the amount disbursed against these. For example, if a bank has the policy of keeping
40% margin against fixed properties, then for a property with value of Rs 100 million,
the maximum allowable funding would be Rs 60 million (100 million – 40% of 100
million). This is called the Drawing Power margin.
Banks may accept any types of assets belonging to a borrower as a security for
funding. It depends upon factors such as liquidity, perish ability, nature and amount of
funding, banks own policy etc. Common types of assets accepted as security are: -
– Highly liquid assets such as Defense Saving Certificates, National Saving
Certificates, Fixed Deposit Receipts, Stock exchange shares and securities etc.
– Movable personal and family assets of the borrowers e.g. jewellery, ornaments
etc.
– WIP stocks, finished goods, raw material stocks etc.
– Residential, commercial or industrial land and/or buildings, houses, shops,
factories etc. etc.
Assets offered as security for bank funding are mostly mutated by bank officials so as
to avoid any subsequent fraudulent activity by the borrowers. Appropriate charges are
created on these assets and where relevant, these charges are registered with the
registrar of joint stock companies as per the guidelines given in the Companies’
Ordinance, 1984.
75

Types of Secutities
 Various types of securities are: -
 Hypothecation
A charge created on movable assets without transfer of physical
possession. Generally created on current assets, including but not
limited to stocks and receivables.
 Pledge
 A charge created on movable assets involving transfer of physical
possession from the borrower to the lender. Also created mostly on
current assets, including stocks.
 Mortgage
Equitable mortgage – Two steps are involved:-
The borrower deposits the title deeds of property with the bank.
A document called “Memorandum of Deposit of Title Deeds” is
executed.
Registered mortgage
A proper mortgage deed is executed. The property is mortgaged in
the name of the bank in government records.
 Personal Guarantees of Promoters/Directors/Corporate Guarantee
 Financial Guarantee (A guarantee for performance by another bank)
 Cash Margin (Up to a certain percentage of total funding e.g. 10% - 25%)
76

• The charges may be created on any of the following basis: -
– First exclusive charge (In the event of liquidation of borrower, if the total
assets fall short of total liabilities, the bank will have First right over
assets without any sharing with any other lender).
– Joint pari-passu charge (In the event of liquidation of borrower, if the
total assets fall short of total liabilities, the bank will have Equal right
over assets without any sharing with any other lender).
– Second Charge (As the name implies, in the event of liquidation of
borrower, if the total assets fall short of total liabilities, the bank will have
a Secondary right over assets after the lenders with first charges are
paid).
77

78
Exercise 1
Classification of loans on objective basis
• Period end: December 31, 2012
• Nature of facility: Demand finance
• Principal outstanding: 25,000,000
• Accrued markup: 250,000
• Markup due on: September 9, 2012
• Markup is still outstanding at December 31, 2012
• Value of liquid assets 10,000,000
• Value of mortgaged asset 30,000,000
Required
Does this party need to be classified as per the requirement of
PR and if yes then calculate the amount of provision?

79
Solution
Markup is overdue by 90 days, so as per Annexure IV of
Prudential Regulation Corporate/ Commercial Banking it
should be classified as “Sub-standard”.
Provision to booked
Principal 25,000,000
Value of liquid asset <10,000,000>
FSV of mortgaged asset <12,000,000>
3,000,000
Provision requirement 25%
Provision 750,000
Note:
Markup accrued will be taken into suspense a/c.

80
Exercise 2
Classification of loans on objective basis
• Nature of facility: Running finance
• Accrued markup: 1,200,000
• Sanction expired June 30, 2012
• Not renewed by Head office
• Value of liquid assets 8,000,000
• Value of mortgaged asset 17,000,000
Required
Does this party need to be classified as per the requirement of
PR?

81
Solution
• Markup is overdue by 180 days, so as per Annexure IV of
Prudential Regulation Corporate/ Commercial Banking it
should be classified as “Doubtful”.
• Provision to booked
• Principal 15,000,000
• Value of liquid asset <8,000,000>
• FSV of mortgaged asset <6,800,000>
200,000
• Provision requirement 50%
• Provision 100,000
Note:
• Markup accrued will be taken into suspense a/c.

82
Exercise 3
Classification of loans on Subjective basis
• Nature of facility: Running finance
• Current ratio 0.5:1
• Auditor’s opinion: Going Concern issue
• Accumulated losses 21,500,000
• Operating cash flow Negative
• CIB report Overdue balance 6 months
Note: Payment of markup and Principal is due on March 30,
2013
Required
Does this party needs to be classified as per the requirement
of PR?

83
Solution
The repayment of markup & Principal is due in march 2013,
so there is no overdue balance, therefore the party cannot be
classified on objective basis.
However, considering the CIB report, there is also going
concern issue and weak financial position as indicated in the
borrower’s financial statement, therefore we should propose
classification on “Subjective basis” at least “sub standard”.

84
Exercise 4
Classification of loans on Subjective basis
• Nature of facility: Cash finance & Running finance
• Principal outstanding: CF - 500,000,000
RF - 100,000,000
• Current ratio: 0.5:1
• Auditor’s opinion: Going Concern issue
• Security: 700,000,000
• Loan disbursement date: November 15, 2012
• Loan sanction: Loan was declined by BOD
subsequent to the approval of President.
Note
1: The loan was disbursed on the approval of President of the
bank as the limit of finance was within the sanctioning
power of the President.
2: Branch has made no further disbursements once the
sanction of facility was declined by BOD.
Required
Does this party need to be classified as per the requirement
of PR?

85
Solution
On the basis of subjective criteria in
PR, we should classify all the
facilities of this borrower as at least
“Sub-standard”.

86
The rescheduling / restructuring of
non-performing loans
Restructuring:
When an advance is restructured, the following concessions /
remissions are considered:
Reduction in rate of mark up;
Capitalization of accrued mark-up/ liquidated damages; and
Part of the loan Principal may be written-off as a very special
case only where circumstances warrant.
Rescheduling
Refers to the extension in the date(s) of payment of the
installment(s) due to various reasons including late
commencement of commercial production or teething
problems faced by the project during trial run.
When an advance is rescheduled almost all general conditions
remain unchanged except their repayment period which is
extended for a certain period.

87
The rescheduling / restructuring of
non-performing loans (Contd..)
Change in the status
Status of the Principal Amount
shall not change the status of classification of a loan / advance
etc. unless; the terms and conditions of
rescheduling/restructuring are fully met for a period of at
least one year (excluding grace period, if any) from the date
of such rescheduling/restructuring and at least 10% of the
outstanding amount is recovered in cash.
Change in the status of the Unrealized mark up
The unrealized mark-up on such loans (declassified after
rescheduling / restructuring) shall not be taken to income
account unless at least 50% of the amount is realized in cash.

88
Exercise 5
If a bank has rescheduled / restructured a loan given to
Company “A” having outstanding balance of Rs.1,000,000
which has the following revised repayment schedule.
Principal Rs.25,000 in every quarter
Interest 10% of the outstanding balance
payable quarterly.

89
Status of the party
If a company has paid to the bank according to the given
repayment schedule and followed other terms and conditions
then the status of a loan will change after 1 year.

90
Exercise 6
If the repayment schedule in the above case is
Principal Rs.25,000 Semi annually
Interest 10% of the outstanding
balance payable quarterly

91
Status of the party
Then the status of classification will change after 2 years
because 10% of the outstanding will be collected in 2 years.

92
Reversal of Provision
In case of cash recovery, other than rescheduling / restructuring,
banks may reverse specific provision held against classified assets;
Classified category Reversal of provision
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
In case of Substandard account Reversal may be made to the

93
Example
Reversal of provision on
cash recovery
Principal amount outstanding Rs.100 million
Security- liquid assets Rs. 10 million
Party classification Doubtful
Mark-up in suspense account 5 million
Nature of finance Demand finance
Provision against the party 45 million
The party has repaid Rs. 10 million (5 million against the principal
amount and 5 million against the mark-up amount.)
Reversal to be made
The adjusted principal after cash recovery Rs. 95 million
Provision at the rate of 50% Rs. 42.5 million
Impact on the provision Provision is decreased
by Rs. 2.5 million that is
50% of cash recovery
against principal

94
Exercise 7
Principal amount outstanding Rs. 300 million
Nature of finance Demand Finance
Security-Liquid assets 100 million
Security-FSV of collateral 100 million
Classification Loss
Mark-up in suspense Rs. 50 million
Provision Rs.100 million
Repayment by the borrower Rs.80 million (50 million against the
mark-up and rest against the principal)
Calculate the reversal in provision amount ?

95
Solution on above exercise
Principal amount after recovery Rs.270 million
Less: Amount of liquid security Rs.100 million
Less: FSV benefit of collateral security Rs.100 million
Principal less liquid security & FSV Rs.70 million
Provision Rs. 70 million
Provision is decreased by Rs. 30 million (Full amount of principal
recovery)

96
Exercise on filling the verification
sheet on advances
Introduction
You have been sent to audit the branch of XYZ Bank where you have
selected ABC party which is incorporated as Company with the SECP to
do leasing business. While performing the credit review, you came to
know that the branch has disbursed demand finance to a party
amounting to Rs. 500 million on August 22, 2008. The sanction advice
# ROI/CAD/2899 dated August 13, 2008 is approved by CAD. The
terms and conditions mentioned in the sanction advice are as follows:
Nature of finance Demand finance
Limit of principal Rs.500 million
Guarantee amount Rs.200 million
Expiry date 3 years
Nature of security 1st parri passu charge
on fixed assets of Rs.666.67 million
Terms of repayments 5 equal semi annual installments
Grace period 6 months
Rate of mark-up *6 month’s KIBOR + 1%

97
Exercise on filling the verification
sheet on advances (Contd..)
Other information
The last installment was received as per terms mentioned in the
sanction advice on August 08, 2009. The branch classifies this party
as regular because the party is paying as per terms agreed. Equity of
the bank as per latest financial statements is Rs. 18 billion
– The six month’s KIBOR will be set on the date of first
disbursement and subsequently on the first working day at the
beginning of each semi annual period for the mark-up due at the
end of the period. KIBOR rates are given as follows:

98
[CLIENT NAME] XYZ Bank Preparer :AA
BRANCH _____Write the name of branch______________________ Reviewer: MFS
PERIOD ENDED: December 31, 2012
BORROWER'S NAME / GROUP NAME ABC
LEGAL STATUS: Company
BUSINESS: Leasing
FUND BASED EXPOSURE Rupees in thousands
As per
Bank
Return
As per
Deloitte
No. of days
PRINCIPAL MARK-UP TOTAL PRINCIPAL MARK-UP August 10
Sep. 30
Demand Finance Regular Regular 500,000 - 500,000 500,000 - October 31
November 30
101
December 31
132
Mark up rate 11.3%
1.0%
Total Funded Exposure 500,000 0 500,000 500,000 - 12.3%
NON - FUND BASED EXPOSURE Rupees in thousands
Markup CalculationRupees in '000
As per
Bank
Return
As per
Deloitte
Loan Oustanding
Amount TOTAL Amount Markup
No. of days outstanding
Guarantee Regular Regular 100,000 100,000 100,000
Markup Calculation
Total Non - Funded Exposure 100,000
Grand Total 600,000
For Single Party Exposure
- 20% of the equity of the bank as disclosed in latest audited financial statements 3,600,000
- 30% of the equity of the bank as disclosed in latest audited financial statements 5,400,000
OUTSTANDING AS AT
December 31, 2009
CLASSIFICATION
OUTSTANDING AS AT December 31,
2007
NATURE OF
FACILITY
OUTSTANDING AS AT
December 31, 2009
NATURE OF
FACILITY
CLASSIFICATION
OUTSTANDING AS AT December 31,
2007

99
Deposits
Deposits of money from customers may be accepted by a
bank in any of the modes permitted by law which includes
deposits on profit / loss sharing (PLS) basis, interest free
deposits.
Different types of deposits
• Current deposit
• PLS deposit
• Call deposit
• Term deposit
• Notice deposit

100
Certain provisions regulating customer operations
include:
(a) All terms and conditions of operating an account should be
conveyed to the account holder at the time of opening an
account.
(b) Banks are free to determine their charges for various
services, but charges relating to exports are determined by
the SBP.
(c) Banks are allowed to charge fee on PLS deposits.
(d) Banks are to get their own automated teller machines or get
connected to a switch, operating in Pakistan.
(e) Banks shall not undertake any business of cash payments
except at authorised places of business.

101
Deposits – Key risk
• Tendency of branch management to override policies,
procedures and local regulations to attract deposit holders
who prefer to keep their identities undisclosed or involve in
transactions having money laundering implications or wrongful
activities.
• Attempt to deliberately manipulate the rate of return in
fractions or effective days to avoid the interest cost on
deposits.
• Identification and disclosure of Dormant and inoperative
Accounts.
• Overstatement of deposit balances particularly at year-end.

102
Review of work papers and
methodology for deposit cycle
Control Assurance Strategy – Maximum control assurance
– Internal control questionnaire
– Use of Control Matrix and Business cycle database
Substantive Procedures
– Audit program
– Legal Compliance checklist
– Working paper templates (Confirmation control summary
and test of details)

103
Transparency in the banking sector is an ever-increasing
concern of the regulators so as to insulate the banking system
from being abused or used as a conduct for illicit activities and
white collar crime. Towards this end, the SBP has issued due
diligence requirements for KYC purposes and anti-money
laundering in line with international best practices.
The salient features of this regime include:
(a) Banks are to ensure the true identity of the account holders and
seek appropriate introduction on the integrity, respectability and
nature of business etc. of the prospective customer.
(b) Banks are to be aware of money laundering crimes and should
develop policies and procedure manuals to minimize this risk.
High ethical standards should be adopted by banks and
adequate training shall be given to all staff on these lines who
should be made aware of their responsibilities.
ANTI-MONEY LAUNDERING AND
KNOW YOUR CUSTOMER (KYC)

104
(c) Banks should have clearly defined and comprehensive KYC
policy for their borrowers and depositors duly approved by their
BOD. Branches of foreign banks shall have such policy duly
approved by their head office.
(d) There shall be in each bank a KYC compliance unit with a full
time head, and a system of monitoring and MIS and a proper
record of customer identification.
(e) Banks should be skeptical of cross-border transactions which
appear to be out of character or apparently inconsistent with
past history, trends and other characteristics.
ANTI-MONEY LAUNDERING AND KNOW
YOUR CUSTOMER (KYC) (Contd..)

105
ACCOUNT OPENING DOCUMENTATION
For Individuals:
• Attested photocopy of Computerized National Identity Card*
(CNIC) or passport of the individual by a gazetted officer or an
officer of the bank / DFI.
• Banks / DFIs shall ensure that the CNIC and the photograph are
of the same person whose account is being opened with them.
• Particulars / CNIC of such persons must be confirmed from
NADRA in writing or through its “VeriSys” system by the bank/
DFI.
• Bank should obtain a attested copy of his service card, or any
other acceptable evidence of service, in case of salaried person.
• In case of illiterate person, a passport size photograph of the new
account holder besides taking his right and left thumb impression
on the specimen signature card.

106
For Partnerships:
• Attested photocopy of identity card of all partners.
• Attested copy of ‘Partnership Deed’ duly signed by all partners of the firm.
• Attested copy of Registration Certificate with Registrar of Firms. In case
the partnership is unregistered, this fact should be clearly mentioned on
the Account Opening Form.
• Authority letter, in original, in favor of the person authorized to operate on
the account of the firm.
For Limited Companies:
Bank should obtain the certified copies of:
• Resolution of Board of Directors for opening of account specifying the
person(s) authorized to operate the company account.
• Memorandum and Articles of Association.
• Certificate of Incorporation.
• Certificate of Commencement of Business.
• Attested photocopies of identity cards of all the directors.
• List of Directors on Form 29 issued by the Registrar.
• Financial Statement should be obtained at the time of opening of account.

107
For Clubs, societies and associations:
• Certified copies of
(a) Certificate of Registration.
(b) By-laws/Rules & Regulations.
• 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).
• An undertaking signed by all the authorized persons on behalf of the
institution mentioning that when any change takes place in the persons
authorized to operate on the account, the banker will be informed
immediately.
For Agent Accounts:
• Certified copy of ‘Power of Attorney’.
• Attested photocopy of identity card of the agent.

108
For Trust Accounts:
• Attested copy of Certificate of Registration.
• Attested photocopy of identity cards of all the trustees.
• Certified copy of ‘Instrument of Trust’.
For Executors and Administrator Accounts:
• Attested photocopy of identity cards of the Executor/Administrator.
• Certified copy of Letter of Administration or Probate.

109
General banking mainly comprises of the
following items
• Bills payable
• Contra items (LC/LG)
• Head office a/c
General Banking

110
Bills payables
An Outward / Inward Remittance is a fund transfer either in
local or foreign currency which can be affected by way of:
Telegraphic Transfers
Transfer of funds from one branch to another branch of the
same bank or other bank under special arrangements of the
payment to the beneficiary through telex / swift / fax is called a
telegraphic transfer.
Inter Branch Credit Advice (IBCAs)
These include the transfer of funds from one branch to another
of the Bank under special arrangements of the payments to the
beneficiary through fax is called Inter Branch Credit Advice
(IBCA).
Demand Draft
Demand draft is a written order, drawn by one branch of a
bank upon another branch of the same bank, or upon other
bank (in both the cases the drawee branch should not be in the
same city) under special arrangements to pay a certain sum of
money to or to the order of a specified person.

111
Contra Account
Letter of Credit
Written undertaking by a bank (issuing bank) given at the request
and in accordance with the instructions of the buyer (the applicant)
to the seller (the beneficiary) to effect payment up to a stated sum
with in prescribed time limit, against stipulated documents and
provider that the terms and conditions are complied with.
L/Cs can be categorized as:
Sight L/Cs (SLC)
Usance L/Cs (ULC)
Sight L/Cs
Sight L/Cs are Letters of Credit where the Bank engages to honour
the beneficiary's sight draft upon presentation of documents
Usance Letters of Credit (ULC)
ULC are similar to sight L/Cs but call for a time or Usance draft
payable after a specified period of time.

112
Letter of Guarantees
These facilities cover a number of specific types of guarantees
that the Bank may issue for its customers but in all cases the
common factors are:
• The Bank substitutes its own credit standing for that of
its customer,
• No actual movement of funds takes place at the time of
issuing the guarantee although there is a clear
commitment by the Bank to effect payment when called
upon to do so under the terms of the particular
guarantee. Thus it is necessary to record these
commitments as contingent liabilities.

113
Head office A/c
• Obtain reconciliation statement
• Ensure that outstanding entries are not outstanding more
than 30 days.
• Make sure no entries of profit and loss are routed through
this account.
• Ensure that suspense account was not misused by making
payments without any consideration detrimental to the
interest of the bank and also make sure that reconciliation
and clearance is properly done in shortest possible time.

114
Documents To Be Used For The Audit Of
Branches
• Instructions
• Audit programs
• Std - Internal Control Memorandum (ICM)
• P.R. review checklist
• Deposit and advances control templates
• Analytical Sheets

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