Credit management

ASSIGNMENT- 2
MBA
(Banking & Finance)

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 CONTENTS AT A GLANCE

REVIEW OF LITRATURE

Priority Sector Lending

• History

Introduction
Objectives of Priority Sector Lending
Priority Sectors
• Agriculture loan
• Small Scale Industries
• Small Business / Service Enterprises
• Micro Credit

Education loans
Impact of priority sector lending on bank management
Revised guide lines for sector

PRACTICAL STUDY
SAUDI PAK COMMERCIAL BANK LTD.

Introduction
• History
• Vision
• Mission

Products
Priority sector

Definition
Impact of priority sector on Saudi Pak Bank
• Increased deposits
• Easy portfolio management
• Credit expansion
• Increased investments
• Increased earning
• Booming economy

Strong asset management

 Advantages
• Disadvantages
• Recommendation
Conclusion

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 PRIORTY SECTOR LENDING

History

At a meeting of the National Credit Council held in July 1968, it was emphasized that
commercial banks should increase their involvement in the financing of priority sectors
like agriculture and small scale industries. The description of the priority sectors was
later formalized in 1972 on the basis of the report submitted by the Informal Study
Group on Statistics relating to advances to the Priority Sectors constituted by the
Reserve Bank in May 1971. On the basis of this report, the Reserve Bank prescribed a
modified return for reporting priority sector advances and certain guidelines were issued
in this connection indicating the scope of the items to be included under the various
categories of priority sector. Although initially there was no specific target fixed in
respect of priority sector lending, in November 1974 the banks were advised to raise the
share of these sectors in their aggregate advances to the level of 33 1/3 per cent by
March 1979. At a meeting of the Union Finance Minister with the Chief Executive
Officers of public sector banks held in March 1980, it was agreed that banks should aim
at raising the proportion of their advances to priority sectors to 40 per cent by March
1985. Subsequently, on the basis of the recommendations of the Working Group on the
Modalities of Implementation of Priority Sector Lending and the Twenty Point Economic
Programmed by Banks, all commercial banks were advised to achieve the target of
priority sector lending at 40 per cent of aggregate bank advances by 1985. Sub-targets
were also specified for lending to agriculture and the weaker sections within the priority
sector. Since then, there have been several changes in the scope of priority sector
lending and the targets and sub-targets applicable to various bank groups. On the basis
of the recommendations of the Internal Working Group, set up in Reserve Bank to
examine, review and recommend changes, if any, in the existing policy on priority sector
lending including the segments constituting the priority sector, targets and sub-targets,
etc. and the comments/suggestions received thereon from banks, financial institutions,
public and the Indian Banks’ Association (IBA), it has been decided to include only
those sectors that impact large segments of population & the weaker sections, and
which are employment-intensive, as part of the priority sector.

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 PRIORITY SECTOR LENDING

Introduction

The Government of Pakistan through the instrument of Reserve Bank of Pakistan (RBP)
mandates certain type of lending on the Banks operating in Pakistan irrespective of their
origin. RBP sets targets in terms of percentage (of total money lent by the Banks) to be
lent to certain sectors, which in RBP's perception would not have had access to
organized lending market or could not afford to pay the interest at the commercial rate.
This type of lending is called Priority Sector Lending. Financing of Small Scale Industry,
Small business, Agricultural Activities and Export activities fall under this category. This
is also called directed credit.

Export finance is, in fact, available at a discount of 20% or more on the normal rate of
interest to Pakistan corporate. Part of the cost of this concession is borne by RBP by
means of refinancing such loans at concessional rate. The Banks, therefore, contribute
towards economic development of the country by subsidizing the business activities
undertaken by entrepreneurs in the areas which are considering "priority sector" by
RBP.

 OBJECTIVES OF PRIORITY SECTOR LENDING

Following are the objectives of priority sector lending

• To improve the economic condition of the country.

• To facilitate the community by direct and indirect financing
• For the setup of more industries in the countries
• Reduction of mandatory credit to a larger number of sectors and sections, including
marginal farmers, cottage industries, small trade and services and low income
housing; incentives
• To improve credit flow to small-scale industries and food crop agriculture as well as
temporary credit
• To assure credit to new industries and new professions by the non-poor section.

 PRIORITY SECTORS FOR LENDING

The priority sectors for all scheduled commercial banks are as under:

• Agriculture loan
• Small Scale Industries
• Small Business / Service Enterprises
• Micro Credit
• Education loans
• AGRICULTURE

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 Direct finance
These include short, medium and long term loans given for agriculture and allied
activities directly to individual farmers, Self-Help Groups or Joint Liability Group of
individual farmers without limit and to others such as corporate, partnership firms and
institutions.

Indirect finance
To agriculture shall include loans given for agriculture and allied activities as specified in
Section I, appended.

• SMALL SCALE INDUSTRIES

Direct Finance
it include all loans given to units which are engaged in manufacture, processing or
preservation of goods.
Indirect finance
These loans include finance to any person providing inputs to marketing
Or output of artisans, village and cottage industries, handlooms and to cooperatives of
producers in this sector.

• SMALL BUSINESS / SERVICE ENTERPRISES

These loans include small business, retail trade, professional & self employed persons,
small road & water transport operators and other service enterprises and other
enterprises that reengaged in providing or rendering of services.

• MICRO CREDIT

Provision of credit and other financial services and products of very small amounts not
exceeding Rs. 50,000 per borrower to the poor in rural, semi-urban and urban areas,
either directly or through a group mechanism, for enabling them to improve their living
standards, will constitute micro credit.

• EDUCATION LOANS

Education loans include loans and advances granted to only individuals for educational
purposes for studies in Pakistan and abroad, and do not include those granted to
institutions.

• HOUSING LOANS

Loans for construction of houses by individuals,(excluding loans granted by banks to

their own employees) and loans given for repairs to the damaged houses of individuals
in rural and semi-urban areas

TARGETS/SUB-TARGETS
Domestic commercial banks Foreign banks
Total Priority 40 per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent 32 per cent of ANBC or
Sector amount of Off-Balance Sheet Exposure, whichever is higher. credit equivalent amount

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advances of Off-Balance Sheet
Exposure, whichever is
higher.
Total 18 per cent of ANBC or credit equivalent amount of Off-Balance No target.
agricultural Sheet Exposure, whichever is higher.
advances Of this, indirect lending in excess of 4.5% of ANBC or credit
equivalent amount of Off-Balance Sheet Exposure, whichever is
higher, will not be reckoned for computing performance under 18
per cent target. However, all agricultural advances under the
categories 'direct' and 'indirect' will be reckoned in computing
performance under the overall priority sector target of 40 per cent of
ANBC or credit equivalent amount of Off-Balance Sheet Exposure,
whichever is higher.
SSI advances Advances to SSI sector will be reckoned in computing performance 10 per cent of ANBC or
under the overall priority sector target of 40 per cent of ANBC or credit equivalent amount
credit
equivalent amount of Off-Balance Sheet Exposure, whichever is of Off-Balance Sheet
higher. Exposure, whichever is
higher.
Micro (i) 40 per cent of total SSI advances should go to units having Same as for domestic
enterprises investment in plant and machinery up to Rs 5 lakh, (ii) 20 per cent of banks.
within SSI total SSI advances should go to units with
investment in plant & machinery between Rs 5 lakh and Rs. 25
lakh (Thus, 60 per cent of SSI advances should go to the micro
enterprises).
Export credit Export credit is not a part of priority sector for domestic commercial 12 per cent of ANBC or
banks. credit equivalent amount
of Off-Balance Sheet
Exposure, whichever is
higher.
Advances to 10 per cent of ANBC or credit equivalent amount of Off-Balance No target.
Sheet
weaker Exposure, whichever is higher.
sections

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 IMPACT OF LENDING ON BANK MANAGEMENT

• The improved economic activity in the economy has had a healthy effect
• Loans of the banking sector in this quarter registered an increase of Rs41.4 billion.
• All this increase was contributed by domestic operations as overseas operations,
which form around 6 percent of the total loan portfolio
• economic activity in the country, the prevailing easy monetary
• Regime was a major boosting factor in lending growth during the quarter.
• Banks have been moving increasingly into new areas.
• Consumer financing have been the focus of lending by banks for quite some
• Time, and during the quarter under review lending to these sectors improved further.
• Lending to the consumer sector surged by Rs10.2 billion (4.7 percent), while the
growth in consumer finance was even more remarkable as this grew by Rs17.4
billion (26.6 percent).

 REVISED GUIDE LINES FOR PRIORITY SECTOR LENDING

Following are the guide lines of priority sector lending

• In the revised guideline, RBP has decided to include those sectors as a part of the
priority sector, that impact large section of the population,
• It has maintained the overall priority sector lending limit at 40% of adjusted net bank
credit for domestic commercial banks and 32% for foreign banks.
• The central bank has increased the home loans under priority sector and loans to
individuals for purchase or construction of dwelling unit per family
• Besides, loans given for repairing damaged houses in rural and semi-urban areas
the in urban and metropolitan areas would also be included as priority sector
advances
• The central bank has also increased the lending for educational loans for studies
abroad.
• The RBP has excluded loans to software industry & investments made by banks in
recapitalization bonds floated by the government and did not include small road and
water transport operations from priority sector lending.

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PRACTICAL STUDY
(WITH RESPECT TO THE TOPIC)

SAUDI PAK BANK

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 SAUDI PAK BANK

Introduction

Saudi Pak Bank is a subsidiary of Saudi Pak Industrial & Agriculture Investment
Company (SAPICO) and a joint venture between the governments of Saudi Arabia and
Pakistan. The Saudi Pak Group comprises of Saudi Pak Insurance, Saudi Pak Leasing
and Saudi Pak Bank. The Saudi Pak Group has holdings in diverse sectors of
Pakistan's economy.

At present, the bank is providing services to its customers with a network of 50 online
branches spanning in 21 cities of the country. In 2008, the majority shareholding of the
bank was acquired by a consortium comprising of Bank Muscat S.A.O.G., International
Finance Corporation (IFC), Nomura European Investment Limited and Sinthos Capital.
A change in management has taken place with Shaukat Tarin as President and CEO of
the organization

History

Saudi Pak Commercial Bank Limited (the Bank) was incorporated in Pakistan on April 4,
1994 as a public limited company under the Companies Ordinance, 1984; the bank
commenced commercial operations on May 07, 1995. Its shares are quoted on all the
Stock Exchanges in Pakistan. The Bank is a scheduled commercial bank and engaged
in banking services as described in the Banking Companies Ordinance, 1962. It
operates 50 branches (December 2005: 50) in Pakistan with the registered office
located 18th Floor, Saudi Pak Tower, Islamabad. The credit rating of the bank rated by
JCRVIS Credit Rating Company Limited is A/A-2. Saudi Pak Industrial and Agricultural
Investment Company (Private) Limited is holding company of the Bank. The accounting
policies adopted for the preparation of half yearly financial statements are the same as
those applied in preparing the annual financial These financial statements are unsuited
but subject to limited scope review by auditors and are being submitted to the
shareholders in accordance with section 245 of the Companies Ordinance, 1984. and
have been prepared in accordance with the requirements of International Accounting
Standard (IAS-34) "Interim Financial Reporting" as applicable in Pakistan. The State
Bank of Pakistan as per BSD Circular No.10, dated August 26, 2002 has deferred the
applicability of International Accounting Standard 39, Financial Instruments: Recognition
and Measurement (IAS-39) and International Accounting Standard 40, Investment
Property (IAS-40) for Banking Companies till further instructions. Accordingly, the
requirements of these Standards have not been considered in the preparation of these
financial statements. However, investments have been classified in accordance with the
categories prescribed by the State Bank of Pakistan vide BSD Circular No.10 dated July
13, 2004.

Vision

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 To transform the bank into a leading, dynamic and premier institution.

Mission

 To provide customer centric products and services to our target market segments
for sustained profitability.
 To perpetuate value creation for all stake holders; customer, share holders,
employees and public

Products

 Online express
 Munafa Hi Munafa
 Saudi pak Term Deposit Account
 Super saver
 PLS Saving Accounts
 Special Notice Deposit Accounts
 Foreign Currency Accounts
 BBA Accounts

 PRIORITY SECTOR LENDING (SAUDI PAK NBANK)

Saudi Pak Bank gives the priority to following sectors for lending

 Agriculture loan
 Small Scale Industries
 Small Business / Service Enterprises
 Micro Credit
 Education loans

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  IMPACT OF LENDING ON BANK MANAGEMENT

Saudi Pak Bank has a positive impact on its management in sense of earning that we
can under stand by looking the following points

 Increased deposits
 Easy portfolio management
 Credit expansion
 Increased investments
 Increased earning
 Booming economy
 Strong asset management
 Liability management

• INCREASED EARNING

The over all impact of the priority sector lending is the increase in earning, because the
bank lend to those sectors which are the powerful areas that support the economy and
increase foreign reserves by the same time these sectors are charged with high interest
rates that increased the bank earning

• CREDIT EXPANSION

Loans in percentage terms show a substantial increase of 33 percent; these loans form
a tiny portion of the overall lending portfolio. Although these newly emerging sectors
improved their share in overall lending portfolio corporate sector, which is the traditional
user of bank credit, absorbed the lion’s share of the quarter’s credit expansion. Lending
to this sector increased by Rs46.5 billion.

• INCREASED INVESTMENTS

The priority sector lending improves the bank earning which enable it to large
investments and raise the cash inflows. The significant about this growth is the rise of
Rs20.7 billion under the head of fixed investment. While this investment would boost
economic activity on a more sustainable basis, this will, in turn, augment working capital
demand in the coming days as well.

• INCREASE DEPOSITS

As for the industry, the deposit base rose significantly in 2006 due to a booming
economy,. The banks are now introducing new products for the public to attract fresh
deposits. The generally increasing deposits relative to the increasing non-performing
loans of the bank may be of concern as it may pose liquidity problems in the future

• BOOMING ECONOMY

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 Along with improvement in the overall economy, the public sector and its enterprises
showed improved performance too. Lending to the public sector declined by around
Rs18 billion over the quarter, thereby leaving more funds for private sector investment
in promising segments of the economy.

• STRONG ASSET MANAGEMENT

The priority sector portfolio makes the easy management of the assets. Bankers can
easily manage their assets to increase cash inflows.

• EASY LIABILITY MANAGEMENT

This creates a balance between assets and liabilities and due to increased cash
flows/earning bank can easily pay off its short term and long term liabilities

• INCREASED LENDING

Looking at the sector wise composition of loans portfolio, the lending of the sector
increased by Rs33.2 billion. While foreign banks actively participated in credit expansion
during the quarter registering a growth of Rs8.9 billion or 7.0 percent,

• EASY PORTFOLIO MANAGEMENT

The liquidity profile of the bank shows a comforting trend. The liquidity situation of the
bank has improved in general over the period under review, with increasing earning
assets to total assets moderate advances growth rate.

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 ADVANTAGES OF PRIORITY SECTOR LENDING

These are the following advantages

 Priority sector lending support the economy of the country.

 It improves the particular area and promotes employment.
 It assists the government in reducing unemployment.
 Lending to priority sectors is the major source of earning for bank.
 Helps to improve the living standards of the nation.
 Provides the financial assistance to weaker industries.
 Promotes /support small and medium enterprises.
 It promote education by providing financial add to institutes
 It improves and promotes agriculture sector which is the back bone of the
economy.
 It creates a balance between assets and liabilities.
 The overall impact on bank management is very pleasant.

 DISADVANTAGE

There is no significant disadvantage of the priority sector lending for the bank and
country as well however there may be some more sectors (which required financial
support) which are being neglected by the bank.

 RECOMMENDATION

Following are the recommendations for the priority sector lending

 It is strongly recommended that the bank should increase the area ofr lending as
it is the effective way to to support the economy and to reduce the
unemployment, to promote industry.
 The amount for lending should be increase so that the maximum community can
be supported To support the single individual in setting their small business

 CONCLUSION

It is concluded that priority sector lending has a great impact on bank management as
well bank earning, this is the powerful tool to support the economy of the country and
the nation as well.

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 REFERENCES & ANNEX
1. TEXT BOOK

Credit Management (Fifth edition) by (Peter S Rose)

2. PRACTICAL STUDY

Saudi Pak Commercial Bank

THANKS & BEST REGARDS

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