Central Banking
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Transcript of Central Banking
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Central Banking
1. THE CENTRAL BANKING
1.1 Acts on behalf of the government to supervise, regulate and control the
country’s banking system. A nationalised corporation run by a board of
directions, governor, deputy governor, and some executive directors and part-
time directors.
(a) banker to the central government and holds the public deposits’.
!eposit include the national loans fund, the consolidated fund and the
account of the paymaster general
(b) central note-issuing authority in "akistan.
(c) manager of the national debt i.e. it deals #ith long-term and
short-term borro#ing by the central government
(d) the manager of the exchange e$ualisation account
(e) acts are agent for the government in carrying
(f) supervisor of the banking
(g) informal supervisor of other financial such as the %tock &xchange.
(h) 'anker to the commercial banks.
(i) As a lender to the banking system %tate 'ank of "akistan #ill
provide the money that banks need
The bank as manager of the exchange eq!"!sat!on accont
1. the deposits of a country’s gold and foreign currency reserves. sed toinfluence the exchange rate
The bank as s#er$!sor of the bank!ng s%stem
1.* has the responsibility under the 'anking Act for
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The bank as "en&er of "ast resort to the commerc!a" bank!ng s%stem
1.+ %tate 'ank of "akistan lends money to the banking system.
(a) supply cash to the banking system, does this by buying eligible bills
from the discount houses exchange for cash’ bills (i.e. debt instruments)
(b) bank #ill remove excess cash from does this by selling bills to the
discount, discount houses obtain interest-bearing bills in place.
"rocess kno#n as open market operations describes the buying and selling of
eligible bills bet#een
'#en market o#erat!ons an& short(term !nterest rates
1. pen market operations provide a method of control over short-term
interest rates.
1. Are traded at a discount to their face value, /nterest rates on bills, have
an immediate influence on other money.
1.0 /f interest rates in the discount market’s open market operations #ent
up, soon be an increase in other money market rates, and then the banks’,
lending rates on bank loans.
1. pen market operations are an important feature of the government’s
monetary policy.
The !n&e#en&ence of act!on of the bank
An adviser to the government, not an agent of the government.
). *TATE BANK '+ ,AKI*TAN -*B,
2.1 have an independent currency and banking system. !ecided #ith /ndiathat the 3eserve 'ank of /ndia #ould continue to act as the central bank and as
currency authority for "akistan, by order called 45onetary %ystem and 3eserve
'ank rder 1*6.
(a) the sole not issuing authority in "akistan
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(b) /ndian notes #ill remain legal tender in both "akistan and /ndia
until 7th %eptember, 1*0.
(c) 'ank of /ndia #ould transfer the assets of value e$ual to
"akistani notes to the 8overnment of "akistan after 7th %eptember,
1*0.
(d) 8overnment of "akistan #ould also issue coins in the countryafter 7th %eptember, 1*0.
(e) 3eserve 'ank of /ndia #ould perform the full functions
Estab"!shment of *tate Bank of ,ak!stan
2.2 3eserve 'ank of /ndia sho#ed reluctance in solving the banking crises.
3efusing to give 3s.++ crore #hich "akistan #as entitled to share
2. 9he 3eserve 'ank of /ndia #as relieved, the first day of :uly, 1*0, the
bank is entrusted #ith the duty of 4regulating the issue of bank notes and
keeping of reserve #ith a vie# to seeking monetary stability in "akistan and
generally to cooperate the currency and credit system of the country to its
advantage, %tate 'ank of "akistan Act, 1+, 4regulate the monetary and credit
system of "akistan and to foster its gro#th in the best national interest #ith a
vie# to securing stability fully and utilisation of the country’s productive
resources.
*hare ca#!ta"
2.* riginal share capital, three crore of rupees divided into three lac, +1;
#as contributed by the <entral 8overnment and the balance *; subscribed by
the private sector. pto 1st !ecember 1, the %tate 'ank #as a government-
cum-shareholders bank in terms of its original statute. =ationalisation
rdinance, 1*, the %tate 'ank has been a purely government-o#ned
institution. 9he private shareholders are compensated by the federal
government through endo#ment of negotiable bonds repayable at par at any
Const!tt!on
2.+ =ot guided by profit motive in its operation. >oster its gro#th in the
best national interest #ith a vie# to securing monetary stability and fuller
utilisation.
2. <onsists of one governor, one more deputy governor and nine directors.
&xecutive committee, empo#ered to transact business on behalf of the central
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board of directions. chief executive, governor #ho controls and directors the
affairs of the bank on behalf, has 1* departments, over +777 persons.
(a) Accounts !epartment
(b) Administration !epartment
(c) Agricultural <redit !epartment(d) Audit !epartment
(e) 'ank <ontrol !epartment
(f) 'ank /nspection !epartment
(g) &ngineering !epartment
(h) &xchange <ontrol !epartment
(i) ?egal !ivision
(@) "ublic 3elations !epartment
(k) 3esearch !epartment
(l) %ecurity’s !epartment
(m) %tatistics !epartment, and
(n) 9raining !epartment.
9he functions of the various departments of the central directorate are briefly
described belo#.
/. +0NCTI'N* '+ *TATE BANK '+ ,AKI*TAN
.1 business and functions, governed by %tate 'ank of "akistan Act, 1+
and 'anking <ompany’s rdinance, 12, operates through t#o separatedepartments
(a) issue departmentB and
(b) banking departments.
.2 issue department issue of notes in the country. 'anking !epartment is
concerned #ith the carrying on and transacting banking business.
(a) %tate 'ank as a bank of issue, has the sole right to issue notes
except one rupees note and subsidiary coins #hich are issued by thegovernment. 9he hank adopted the proportional reserve system for the
issue of notes. <urrency backing by gold bullion, foreign securities is
no# fixed at 3s.1277 million through an rdinance in !ecember, 1+.
%ystem of note is kno#n as minimum reserve system. %iCe of notes
issue reflects the public demand for money. Assets of the /ssue
!epartment are al#ays e$ual to liabilities.
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(b) 'anker to the government. Acts as a banker to the government,
balances of the central and provincial governments are deposited #ith
the %tate 'ank does not pay interest on them. 9he bank administers
exchange control on behalf of the government. /t carries out exchange,
remittances and other banking operations including the management of public debt. >loats ne# loans on behalf of the central.
(c) <ustodian of the cash reserves of the commercial banks in
"akistan. All the scheduled banks are re$uired to maintain #ith the %tate
'ank of "akistan at least +; balance of the replenishes the commercial
banks stocks of cash #hen they are running lo#.
(d) %tate 'ank as a clearing house. 9he clearing house is a place
#here the representatives of commercial banks meet each day to
exchange che$ues dra#n on each other and then settles the differences
o#ed to each other .
(e) Advisor to government. %ince, the bank is deeply involved in the
money and foreign exchange, its therefore, tender advice on financial
and economic matters to the government. /t also provides advice to
commercial banks %tate 'ank has a direct link #ith international bodies
like /53, /'3! etc.
(f)
%tate 'ank as a lender of last resort. <ommercial banks are shortof cash reserves due to large debt balances in the inter-bank. /t provides
cash to the commercial banks by rediscounting bills of exchange,
treasury bills and other gilt edged securities.
(g) %tate 'ank as a controller of credit. Das #ide po#er to use the
instruments of credit control for influencing the aggregate spending, the
inflation rate and the balance of payments in the country.
ses to tools of open market operations, discount rate and the percentage
reserve re$uirements
other minor tools such as issuing directives to restrict bank advancesregulating credit in the country.
(h) %tate 'ank and economic gro#th, playing a significant role in
facilitating and fostering economic development and gro#th of the
banking, promotional activities of the bank.
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(i) 9he development of the capital market in the country
(ii) nder the %tate 'ank’s &xport >inance, provide finance to
the exporters at the concessional
(iii) Delped in the establishment of specialised creditinstitutions for meeting the medium and long-term, /!'", A!'9,
=/9, &">, (&$uity "articipation >und) =!><, D'><, /<"
. CLEARANCE H'0*E
+.1 Association of commercial banks, purpose of interchange and
settlement of credit claims. =ational 'ank of "akistan, as a representative,
"akistan, acts as a clearing house.
+.2 <he$ue, as #e kno#, is an effective method of making payments. Ehen
che$ues are dra# on one bank and the holder (payee) deposits the same in his
account at the bank of dra#er, the mutual obligations are settled by the internal
bank administration and there arises no interbank debits from the use of
che$ues. 9he total assets and total liabilities of the bank remain unchanged.
+. /n practice, the person receiving a che$ue is rarely a depositor of the
che$ue at the same bank as the dra#er. De deposits the che$ue #ith his bank
(other than of the payer) for the collection of the amount. =o#, the bank in
#hich the che$ue has been deposited becomes a creditor of the dra#er’s bank.9he debtors bank #ill pay his amount of the che$ue by transferring it from cash
reserves if there are no offsetting transactions. /n the course of everyday life,
there are large number of che$ues dra#n on a bank deposited in other banks.
9he banks on #hich the che$ues are dra#n become in debt to the banks in
#hich the che$ues are deposited.
*.+ 9his facility of net interbank payments is provided by the clearing
house.
*. ?ocal commercial banks meet at a fixed time on all, meeting is held inthe office of the bank #hich, che$ues payable at other local banks and receive
the che$ues dra#n, A summary sheet is prepared #hich sho#s the names of
the
difference bet#een the totals represents the amount to be paid by particular
bank and the amount, 9he net payments are made issuing a credit voucher on
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*. 9he #orking of clearing house is no# explained #ith the help of an
example. ?et us assume there are five banks in city and at the end of days
operation, the follo#ing payments are due to the banks from each other
3s.Cheqes &ra2n on
,ackage of contents
Bank A Bank B Bank C Bank 3 Bank E Tota"
Rs. Rs. Rs. Rs. Rs. Rs.
'ank A - 1*,777 27,777 1*,777 0,777 +,777
'ank ' 17,777 - 12,777 17,777 1,777 *0,777'ank < ,777 17,777 - ,777 *,777 2,777
'ank ! *,777 1,777 1,777 - 12,777 *0,777
'ank & 0,777 12,777 0,777 10,777 - *,7779otal 20,777 +2,777 +,777 *0,777 *7,777 22*,777
*.0 >or clear understanding the table is summarised belo#
Banks Cheqe
Rece!$e&
-3eb!t
Cheqe
Broght
-Cre&!t
3eb!t
Ba"ance
Cre&!t
Ba"ance
'ank A 20,777 +,777 - 20,777'ank ' +2,777 *0,777 *,777 -
'ank < +,777 2,777 7,777 -
'ank ! *0,777 *0,777 - -'ank & *7,777 *,777 - ,777
9otal 22*,777 22*,777 *,777 *,777
*. >rom the above table it is clear that 'ank ' and < are to pay debit
balances of 3s.*,777 and 7,777 respectively (9otal 3s.*,777). 'ank A and &
are entitled to receive their credit balances of 3s.20,777 and ,777 respectively
(3s.*,777 in total). 'ank !’s credit and debit balances are e$ual. Dence,
che$ues #orth 3s.22*,777 are cleared by a more payment of 3s.*,777. 9he
clearing house thus helps in saving a lot of cash reserves and transactions,
reduces the number of entries made in the registers and eliminates the
unnecessary task of carrying the che$ue packages from one bank to another
bank.
4er!ts of c"ear!ng hoses
*.17 9he main advantages of clearing house are as under-
(a) %ettlement of mutual obligations of commercial banks
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(b) Douse provides an opportunity to the commercial, off inter bank debits
#ithout making payments in cash
(c) 9he central bank keeping the cash reserves of the banks
(d) Douse provides an opportunity to promote the interest of the member banks.
uniform policy for issuing of bank
(e) <an also prove an effective device for preventing, competition
(f) >inancial stress, the member banks can assist.
. *TATE BANK '+ ,AKI*TAN A* C'NTR'LLER '+ CRE3IT
'b5ect!$es of cre&!t contro"
+.1 %tate 'ank of "akistan Act, 1+ gives special po#ers to the %tate 'ank
to regulate, credit policy pursued, %tate 'ank aims at channelising funds of the
commercial banks to productive sectors of the country. /t discourages the use of
bank loans for non-productive purposes so as to achieve prosperity, stability
and the gro#th of domestic economy. 9he long term ob@ectives of the credit
policy of the %tate 'ank, ho#ever, is the promotion of high and stable level of
employment in the country.
Instrments of cre&!t contro"
+.2 main instruments of credit policy applied by the %tate 'ank of "akistan
are no# discussed in brief.
6ant!tat!$e contro"
Bank rate
+. 'ank rate is also called the discount rate. /s the official rate at #hich the
%tate 'ank rediscounts the first class securities at its counter. the bank rate is
raised
follo#ed by an increase in the discount rate of commercial banks.
discourage in the country and it eventually, bank rate has the opposite effect.
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+.* no# charging 17; on rediscounting the first class bills of exchange.
the discount rate has not proved to be an effective instrument of credit
as the bill market is not very organiCed and soundly
rate #eapon is no# replaced by the po#er for the bank to fix its profit sharing
ratio in respect of its o#n financial assistance.
Open market operations
+.+ meant the sale and purchase of government securities in the open
market by the central bank of the country. 9he sale of securities leads to
contraction of credit and the purchase, therefore, to the expansion of credit.
+. Das been using this #eapon to regulate the flo# of the credit in the
country.
(a) money market is not responsive in "akistanB
(b) the commercial banks are carrying excess reserves the
themselvesB and
(c) the marketable securities are inade$uate.
7ar!ab"e reser$e req!rements
+. &ffective #eapon of credit control of the central bank of a country.
%ection of the Act, re$uires the scheduled banks to maintain at least +; of
demand and time liabilities #ith it, the po#er to change the minimum reserverests #ith the %tate 'ank.
+.0 9he instrument of variable reserve ratio, is used for affecting the
li$uidity position of the banks and hence their ability to finance. Ehen the
reserve re$uirements are raised by the central bank, thus restricts and expansion
of credit in the country. <entral bank lo#ers the reserve ratio. 9he commercial
banks are also re$uired to maintain 2+; li$uidity ratio on a day to day basis
against their time an demand liabilities.
Cre&!t rat!on!ng
+. &mpo#ered to place limits on the amount available for each application
of loan.
Cre&!t target
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+.17 "akistan has set up =ational <redit <onsultative <ouncil (=<<<) in
1*. 9he functions of =<<< is to examine overall credit situation in the
country and indicate the credit limits for the public and private enterprises. 9he
%tate 'ank of "akistan sets specific target of funds to be given to agriculture
business industry and lo# cost housing by the commercial banks. /f the
commercial banks fail to achieve the ceilings, it imposes penalty on them. 9hedefaulting commercial banks shall have to make interest free loan to the %tate
'ank of the amount falling short of the target.
6a"!tat!$e contro"s
5oral persuasion
+.11 'anks are advancing funds for speculative or non-essential, %tate 'ank
can persuade and directly appeal to them to follo#.
3!rect act!on
+.12 /f the commercial banks do not act upon the credit policy of the %tate
'ank, the %tate 'ank is empo#ered to take action against them.
+.1 5oeen Fureshi made the %tate 'ank of "akistan an autonomous central
bank. %et and implement standards for commercial banks lending vie#
independently.
,r&ent!a" contro"s
Intro&ct!on
+.1* Eith a vie# to provide for a continued health and viability of financial
system, the "rudential 3egulations ("3) have been issued in the follo#ing
areas
(a) "3 issued by %tate 'ank of "akistan
(i) <orporate and <ommercial 'anking
(ii) %mall and 5edium &nterprises financing
(iii) <ustomer financing
(b) "3 issued by %ecurity and &xchange <ommission of "akistan
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(i) =on banking finance companies
(ii) 5odarabas.
,R for cor#orate an& commerc!a" bank!ng
+.1+ 9hese regulations are divided into follo#ing categories
(i) 3isk management
(ii) <orporate 8overnance
(iii) Gno# your customer H and anti-money laundering
(iv) perations.
+.1 A brief of the regulations dealing #ith credit control is as follo#s.
-a Reg"at!on R(1
?imited on exposure to a single person any single person shall not at
any point in time exceed 7; of the bank’s I !>/’s e$uity, to the
condition that the maximum outstanding against fund based exposure
does not exceed 27; of the bank’s
-b Reg"at!on R()
?imit on exposure against contingent liabilities exceed at any point in
time 17 times of its e$uity.
-c
Reg"at!on R(/5inimum conditions for taking exposure give due #eightage to the
credit report relating to the borro#er and his group obtained from <redit
statements duly audited by a chartered accountant.
-& Reg"at!on R(8
?imit on exposure against unsecured financing facilities
unsecured I clean financing facility in any form of a sum exceeding
3s.+77,777I- (3upees five hundred thousand only) to any one person.
-e Reg"at!on R(?inkage bet#een financial indicators of the borro#er and total exposure
from financial institutions.
(i) the total exposure (fund-based and I or non-fund based)
availed by any borro#er from financial institutions does not
exceed 17 times of borro#er’s e$uity.
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(ii) the time of allo#ing fresh exposure I enhancement I
rene#al, the current assets to current liabilities ration of the
borro#er shall not be lo#er then 11.
-f Reg"at!on R(9
&xposure against shares I tfcs and ac$uisition of shares
(i) (1) &xposure against shares I 9><% 'anks I
!>/s shall not take exposure.
(ii) (2) Ac$uisition of shares scripts in excess of
+; of their o#n e$uity o#n e$uity investment of banks in
shares should not exceed 27; of their o#n e$uity.
(g) Reg"at!on 3-
8uarantees All guarantees issued by the banks I !>/s shall be fully
secured, except in the cases such as bid bonds, performance bonds and
guarantees.
-h Reg"at!on R(:
Assuming obligations on behalf of ='><% !>/s shall not issued by
guarantee or letter of comfort nor assume any obligation #hatsoever in
respect of deposits, sale of investment certificates, issued of commercial
papers, or borro#ings of any non-banking finance company.
-! Reg"at!on R(1;
>acilities to private limited company !>/s shall formulate a policy, duly
approved by their 'oard of !irectors, about obtaining personal
guarantees of directors of private limited companies.
-5 Reg"at!on R(1)
5onitoring %tatements from borro#ers that contain a bank-#ise.
,R for sma"" me&!m enter#r!ses f!nanc!ng -*4Es
+.1 3isk management category (3). >or the remaining three categories Ji.e.
<orporate 8overnance (8), Anti 5oney ?aundering (5) and perations ()K
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"rudential 3egulations for %5&s >inancing, %5& means an entity, ideally not a
public limited company, #hich does not employ more than 2+7 persons
+7 persons
(a) A tradingIservice concern #ith total assets at cost excluding land and
building upto 3s.+7 million.(b) A manufacturing concern #ith total assets at cost excluding land an
building upto 3s.177 million.
(c) Any concern (trading, service or manufacturing) #ith net sales not
exceeding 3s.77 million as per latest financial statements.
An individual, if he or she meets the above criteria, can also be categoriCed as
an %5&.
+.10 A brief of the regulations dealing #ith credit control is an follo#s
-a Reg"at!on R(1
%ource and capacity of repayment and cash flo# backed lending to the
identified.
-b Reg"at!on R()
"ersonal guarantees All facilities except those secured against li$uid
assets, extended to %5&s shall be backed by the personal guarantees of the
o#ners of the %5&s.
-c Reg"at!ons R(/
?imited on clean facilities secured solely against personal guarantees, on a
%5& up to 3s. million provided that funded exposure should not exceed 3s.2
million.
-& Reg"at!on R(8
%ecurities 3elaxation in 3egulation 3-, for facilities upto 3s.
million, all facilities over and above this limit shall be appropriately secured as
per satisfaction of the banksI!>/s.
-e Reg"at!on R(
5argin re$uirements 'anksI!>/s are free to determine the margin
re$uirements on facilities provided by them to their clients taking into account
the risk profile of the borro#er(s) in order to secure their interests.
-f Reg"at!on R(9
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"er party exposure limit 9he maximum exposure of a bank I !>/ on a single
%5& shall not exceed 3s.+ million.
-g Reg"at!on R(<
Aggregate exposure of a bank I !>/ on %5& sector shall not exceed the
prescribed limits.
-h Reg"at!on R(=
5inimum conditions for taking exposure !>/ should give due #eightage to
the credit report relating to the borro#er and his group.
-! Reg"at!on R(:
"roper utiliCation of loan 9he loans have been properly utiliCed by the %5&s
and for the same, ac$uired I obtained.
-5 Reg"at!on R(1;
3estriction on facilities to related parties n a %5& in #hich any of its
director, ma@or shareholder holding, any family member of these persons is
interested.
,R for Consmer +!nanc!ng
+.1 >inancing allo#ed to, personal, family or household needs.
(i) <redit <ard mean cards, #hich allo# a customer to make payments on credit. %upplementary credit cards shall be considered part
of the principal borro#er. <orporate <ard #ill not fall under this
category and shall be regulated by "rudential 3egulations for credit
cards shall also be applicable on charge cards, value cards and '9>
('alance 9ransfer >acility).
(ii) Auto loans mean the loans to purchase the vehicle for personal
use.
(iii) 5eans loan provided to individual for the
(iv) "ersonal loans mean the loans to individuals for the payment
3unning >inance I 3evolving <redit to individuals.
9hat any financing facility, other than %5&s >inancing, above, shall be
governed by the "rudential.
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+.1 9hese are divided into follo#ing categories.
(a) 3egulations (general concept)
(b) 3egulations for credit cards
(c) 3egulations for auto loans(d) 3egulations for housing finance
(e) 3egulation for personal loan including loan for the purchase of
consumer durables.
+.27 A brief of the regulations dealing #ith credit control is as under
-a Reg"at!on R(1
&xtended by banksI!>/s to their directors, ma@or shareholders,
employees
persons shall be at arms length basis and on normal terms.
-b Reg"at!on R()
9he prescribed limit on exposure against total consumer financing shall
not be exceed.
-c Reg"at!on R(/
9otal financing facilities to be commensurate #ith the income.
-&
Reg"at!on R(88eneral reserve against consumer finance 8eneral reserve at least
e$uivalent to 1.+; of the consumer portfolio #hich is fully secured and
+; of the consumer portfolio #hich is unsecured.
-e Reg"at!on R(
'ar on transfer of facilities from one category to another to avoid
classification transfer any loan or facility to be classified
-f Reg"at!on R(9
5argin re$uirements !etermine the margin re$uirements on consumer facilities provided by them to their clients taking
,R for non bank!ng f!nanc!ng com#an!es -NB+Cs
+.22 =on 'anking >inancial /nstitutions (='>/s), <ompanies (='><s) and
are being regulated, =ovember 1+, 2772, information, returns and statements to
%&<" and <redit /nformation 'ureau, in the same manner.
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+.2 "art // of these rules applies to borro#ing facilities for (a) corporate
borro#ers.
+.2* A brief of the conditions is as follo#s
(a) ?imit on ='><’s exposure to a single person ='>< to any
single person shall not at any point in time exceed 7;, &xceed 27; of
the ='>< e$uity.
(b) 5inimum conditions for grant of financing facilities.
(i) >undInon-fund based facility exceeding, /nformation
'ureau of the %tate 'ank of "akistan. /f the credit report
indicates.
(ii) btain copy of accounts relating to the business of each.
(iii) &nsure that the ?oan Application >orm prescribedIdevised
by a modaraba is accompanied, 6'orro#er’s 'asic >act %heet’.
(c) 'orro#er’s e$uity and total exposure from financial institutions
'orro#er from institutions does not exceed 17 times.
(d) >inancial indicators of the borro#ers !ebt-e$uity ratio of the
borro#er
current liabilities ratio is not lo#er than 11.
(e) 5argin against facilities 5inimum margins shall be maintained
against various facilities and all guarantees #ill be backed by 177;
realiCable securities.
(f) >acilities against %hares I 9><’s and ac$uisition of share ='><
shall not take exposure against the security of shares I 9><s issued by
them.
,R for 4o&arabas
+.2+ "art // of these rules applies to borro#ing facilities for (a)
corporate borro#ers an (b) individual borro#ers.
+.2 A brief of the conditions is as follo#s
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(a) ?imit on modaraba’s exposure to a person "oint in time
exceed 7; of the modaraba’s e$uity, exceed 27; of the
modaraba’s e$uity.
(b) 5inimum conditions for grant of financing facilities
(i) 9o give due #eightage to credit report relating to
the borro#er and his group obtained from <redit
/nformation 'ureau of the %tate 'ank of "akistan.
(ii) Ehile granting any facility to the customers other
than individuals, modaraba shall obtain copy of accounts
relating to the business of each of its borro#er for
analysis and record.
(c) ?inkage bet#een a borro#er’s e$uity and total exposure,
moderabas shall ensure that the total exposure availed by any
borro#er from financial institutions does not exceed 17 times of
borro#er’s e$uity as disclosed in its financial statements.
(d) >inancial indicators of the borro#ers e$uity ration of the
borro#er does not exceed 7*7 and current assets to current
liabilities ratio is not lo#er than 11
(e) 5argin against facilities 5argins shall be maintained
against various facilities and all guarantees #ill be backed by
177; realiCable securities
(f) >acilities against %hares I 9><s and ac$uisition of shares
5odarabas shall not take exposure against the security of
shares I9>< issued by them.
(g) 3egulations for Dousing >inance for individuals
(i) 9he maximum per party limit in respect of housing
finance by the modarabas #ill be 3s..+ million.
(ii) 5odarabas are free to extend mortgage loans for
housing, for a period not exceeding t#enty years.
5odarabas should be mindful of their ade$uate asset
liability matching.
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(iii) 9he house financed by the moderabas shall be
mortgated in modaraba’s favour by #ay of e$uitable or
registered mortgage.
(iv) 5odarabas shall either engage professional
expertise or arrange sufficient training for their concernedofficials to evaluate the property, assess the genuineness
and integrity of the title document, etc.
(v) 9he housing finance facility shall be provided at a
maximum ?oan to Lalue ratio of 0+177 (0+;)
(vi) 9he housing finance facility shall be provided at a
maximum of /ncome to installment ratio of 1.
9. CENTRAL BANK A* THE G'7ERN4ENT>* BANKER
.1 <entral bank in each country, has no# been assigned the responsibility
of acting as fiscal agent to the government. "reviously, this duty #as performed
by a large number of government treasuries spread all over the country. 9he
services performed by treasuries for receiving, holding and disbursing of
government funds #ere dissatisfactory. 9he treasury office established at
different places #ere expensive to operate. 9he net movement of coins and
paper money into and out of the treasury #ere also risky. /t #as, therefore,
decided that the central bank should be given the privilege and also theresponsibility to deposit free of interest all the cash balances of the government
and in lieu therefore perform some fiscal functions for the government. 9hese
functions in brief are as under
(a) <entral 'ank as government’s banker. 9he central bank acts as a
banker to the government. /t deposits free of interest all the cash
balances of the government. /n return, it performs all the services #hich
a commercial bank ordinarily does for its customers. /t receive on
deposits, income taxes, customers and other internal revenues taxes. /t
also undertakes the #ork of collection of che$ues and drafts dra#n onother banks and provides cash to the government. 9he bank pays
salaries, pensions, reliefs, public #orks, etc., on behalf of the
government. /t transfers funds from one part of the country to another or
from one account to another for the government. 9he central bank grants
short-term loans to the government against government securities. /n
time of emergencies like #ar or depression, it makes extraordinary
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advances to the government. 9he bank charges no commission from the
government for all these banking services rendered by it.
(b) 'ank as agent of the government. 9he central bank acts as agent
of the government. /t is entrusted #ith the issued of ne# loans and
treasury bills on behalf of the government. /t pays interest on the publicdebt and redeems maturing securities. /t also under#rites securities of
the government. 9he central bank also acts as agent in gold and foreign
exchange transactions for the treasury. /t also buys and sells foreign
exchange on its o#n account and as agent for the treasury. /t services as
depository of /5> and /'3!.
(c) 'ank as a financial advisor. 9he central bank performs a very
important function by acting as financial advisor to the government.
9hough the government has its o#n staff for giving advice on matters of
economic policy, yet it obtains advice from the central banks also. 9he
central bank is constantly in touch #ith the money, securities and foreign
exchange market conditions in the country. /t, therefore, gives advice to
the government in its debt management, foreign exchange transactions,
deficit financing, devaluation of the currency, trade policies,
mobilisation of savings, agricultural and industrial credit, etc. 9he
central bank also acts as fiscal agent for various agencies and
corporation established by the government.
<.
R'LE '+ *TATE BANK '+ ,AKI*TAN IN THE EC'N'4IC3E7EL',4ENT
.1 9he role of the %tate 'ank of "akistan is not confined no# to the
regulation of overall supply of credit in the country. /ts aim is to create a
machinery #hich helps in mobilising domestic resources. 9hese resources are
directed into productive channels, helping in the establishment of specialised
financial institutions for carrying out development programmes in various
sectors of the economy, holding the price line, increasing employment and
maintaining e$uilibrium in the balance of payments. 9he role of %tate 'ank of
"akistan is, therefore, promotional and developmental. 9he %tate 'ank of "akistan since its establishment in :uly, 1*0 has taken the follo#ing measures
for promoting economic development in the country.
(a) 8ro#th of banking system. At the time of partition, there #ere
only t#o 5uslim scheduled banks, Dabib 'ank ?imited, and Australia
'ank operating in "akistan. 9he %tate 'ank immediately after its
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establishment in 1*0, took up the herculean task in building up a sound
banking system in the country. 9he start #as made #ith the
establishment of =ational 'ank of "akistan in 1*. %ince then the total
number of domestic commercial banks and foreign banks have increased
to 2+ and 1 #ith 02 and * braches respectively in operation in the
country. 9hese banks are paying a prominent role in the mobilisation of saving in rural and urban areas an disbursing credit for promoting
developing in the country.
(b) Assistance to specialised financial institutions. 9he %tate 'ank of
"akistan is providing assistance to specialised financial institutions for
enabling them to extend ade$uate finance to different sectors of
economy. 9he loans are given to Agricultural !evelopment 'ank of
"akistan (A!'") for financing seasonal agricultural operations and for
development of agriculture. 9he Douse 'uilding >inance <orporation
(D'><), /ndustrial !evelopment 'ank of "akistan (/!'"), =ational
!evelopment >inance <orporation (=!><), /nvestment <orporation of
"akistan (/<") and >ederal 'ank of <ooperative also get financial
assistance from %'".
(c) 5onetary and credit policy. 9he bank is pursuing a monetary
policy #hich aims at
(i) checking inflationary pressureB and
(ii) ensuring ade$uate availability of bank finance for productive activities in general and the priority sectors in
particular.
(d) &xport finance scheme. nder the %tate 'ank >inance %cheme,
the banks are providing finance to the exports at the concessional rates.
9he refinance, in turn, is provided by the %tate 'ank at lo# rate of
interest.
(e) <redit targets for priority sectors. 9he %tate 'ank gave targets to
commercial banks for providing small loans in the fields of business,industry, agriculture, housing every year. 9he prescribing of credit target
for priority sectors have greatly helped in raising production.
(f) /slamisation of financial system. As a part of the government
policy, the %tate 'ank of "akistan has prepared and implemented a
programme of /slamic modes of financing, from :uly 1, 10+. All
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financing and loaning operations of the banks conform to the /slamic
system. 9he non-bank financial institutions like the /<", =/9, %'><,
'&? ('anker &$uity ?imited) have also converted to entire investment
operations on an interest free basis.
(g) &stablishment of banking publicity board. 9he %tate 'ank ?imited to set up 'anking "ublicity 'oard in 1+ for developing
banking habit among the people and for mobilisation of savings in the
length and breadth of the country.
(h) 5anaged float. 9he %'" fixes the "akistan’s rupee exchange
parity against the basket of currencies. "akistani rupee has been made
fully convertible on current account from :uly, 1*.
(i) 9raining scheme. 9he %tate 'ank started a training scheme for
imparting banking kno#ledge to the persons #orking in the banks and to
those #ho are to @oin banks as their profession. 9he training scheme #as
a success and it produced a large number of trained bankers of financial
experts for the various banking concerns.
(@) %tate 'ank and autonomy. 9he %tate 'ank no# regulates 1
financial institutions in the country the breakup of #hich is as follo#s
!omestic 'anks 2+
>oreign 'anks 15odaraba <ompanies +2
?easing <ompanies 2
/nvestment 'anks 12
9otal 1
9he %'" should have constitutional po#ers to dictate monetary policy. /t
should be an independent institutions offering expert counsel #ith
po#ers to implement them.
.2 9hose #ho oppose this vie# are of the opinion that ultimate decision-making po#ers for guiding and managing the economy should rest #ith the
democratic government of the country. /t is correct that the ultimate decision
making po#er should be government of the country but the policies #hich
shape the level of inflation and interest rate should lie #ith the central bank. /f
the central bank’s autonomy is chipped a#ay, then the demand for budgetary
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support to centre and provinces #ill continue rising leading to inflationary
pressure in the country.