The State Bank of Pakistan (SBP) has revised the Prudential Regulations for Consumer Financing with an aim to promote consumer financing in a sustainable and fair manner while ensuring financial stability of the banks/DFIs. The revised regulations provide more discretion in decision making to banks/DFIs in line with their dynamic business environment.
It may be mentioned here that the SBP periodically reviews its regulatory framework in order to align it with the changing business environment and international best practices.
Under these regulations, and others, banks/DFIs are advised to develop a common glossary of important terms and all the banks will use these important terms in their loan documentation. The development of common nomenclature of important terms will not only complement the disclosure requirements of terms and conditions but will also facilitate the general public to better understand the terms of the loans and perform a meaningful comparison of the financing products offered by different banks.
Banks/DFIs have also been advised to initiate assessments for introduction of differentiated loan pricing in all consumer financing products, which, among other things, should be sensitive to loan product characteristics, borrowers’ risk assessment, regular timely repayments and exemplary behavior.
Banks/DFIs maintain general provision against performing consumer financing portfolio to protect them from the risks associated with the cyclical nature of this business. The revised regulations introduce tier-based general provision requirement linked with gross non-performing loan ratio (GNPLR) of the banks/DFIs. The regulation aims to incentivise banks/DFIs which have lower GNPLR and promote better risk management practices.
Banks/DFIs have been allowed six months time to achieve compliance with the new or revised regulations.