Regulations for banks dealing with issuing guarantee revised

KARACHI: The State Bank of Pakistan on Monday revised the maximum limit upto 10 percent of equity of the bank or DFI for issuing guarantee against the back-to-back or counter guarantee by a foreign unrated, or under-rated bank or DFI.

The central bank, through a circular issued by Banking Policy and Regulations Department (BPRD), has revised Para 2 of Regulation R-7 of Prudential Regulations forCorporate/Commercial Banking.

"The SBP revised conditions and limits for banks or development finance institutions (DFIs) for issuing guarantee against the back-to-back/counter guarantee of an unrated, or rated below bank/DFI that is situated in a foreign country."

The sub para (a) has been revised as, the aggregate amount of all such guarantees at any point in time should not exceed 10% of the bank's/DFI's own equity as disclosed in the latest audited financial statements.

The central bank, earlier in June 2016 has amended the para 2 to include two sub paras; of them para (a) stated that "the amount for single transaction shall not exceed $500,000/-, and the aggregate amount of all such guarantees at any point in time should not exceed 5 percent of the bank/DFI's own equity as disclosed in the latest audited financial statements".The sub para (b) further states that, "the banks/DFIs will have a board of directors (BoD) approved policy having internal limits for acceptance of such counter guarantees based on, inter alia, their own risk appetite and relevant risk factors". The policy may also set more conservative limits than as prescribed in para (a) above. There shall also be instituted a mechanism to monitor such exposures and limits.

"Under the prudential regulations banks of DFIs could issue guarantees on behalf of Pakistani firms and companies functioning in Pakistan against the back to back/counter-guarantees of banks/DFIs rated at least or equivalent by a credit rating agency on the approved panel of State Bank of Pakistan."

Besides, the counter-guarantee of bank/DFI situated in a foreign country is also acceptable if it has the rating of at least ''A'' or equivalent on global or National Rating scale by Standard & Poor, Moody''s, Fitch, Japan Credit Rating Agency (JCRA) or a local credit rating agency of the respective country provided the guarantee issuing bank in Pakistan is comfortable with and accepts the counter -guarantee of such foreign bank.