Banking Laws & Practices - BNK601 Handouts

Banking Laws and Practices-BNK 601 Table of Contents
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LESSON 1................................................................................................................................. 1
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Banking laws and practices-BNK 601 COURSE MANAGEMENT
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Objectives #his course has $een designed with the !iew to "ocus special e%phasis on the "ollowing aspects& 'e!eloping interpretational skills and clear understanding o" the students regarding pre!alent $anking and ancillary laws in Pakistan( 'e!eloping pro"essional skills so as to apply these laws in real li"e situations( )na$ling the% to %anage legal re*uire%ents pertaining to $anks and $anking transactions( Course management: #he entire course would co%prise o" the "ollowing %odules+ detail o" the topics co!ered under these %odules is also gi!en hereunder& Module ,t would co!er the "ollowing topics& Course -anage%ent ,ntroduction to legal syste% o" Pakistan ,ntroduction to Banking Laws Module ! "inancial s#stem and ban$ing: it would co!er the "ollowing topics.contents& /inancial institutions /inancial %arkets 0 /inancial instru%ents Evolution o% &an$ing: it would co!er in detail the "ollowing topics.contents& 1istorical $ackground Nationali2ation o" $anks #he 3$anks nationali2ation 4ct+ 15678 "ollo'ing to(ics s)all be covered at lengt) in t)is module: 'irect "inance+ indirect "inance+ /oreign e9change %arket+ :tock %arkets+ Bond %arkets+ /inancial ,nter%ediaries including& Co%%ercial Banks+ Credit nions+ :a!ings and Loan 4ssociations+ -utual :a!ing Banks+ -utual /unds+ /inance Co%panies+ Pension /unds etc( Key :er!ices Pro!ided $y /inancial ,nstitutions like ;isk :haring+ Li*uidity ,n"or%ation ser!ices( <e shall also discuss concept and scope o" 'e$t and e*uity %arkets+ Pri%ary -arkets and secondary %arkets+ )9change %arkets and o!er-the-counter %arkets 3=#C8+ including /orward contracts and "uture %arkets( %oney %arket ,nstru%ents and Capital %arket instru%ents( Module * Some im(ortant statutes regarding ban$ing++ #his would co!er the "ollowing statutes& &an$ing Com(anies Ordinance, -.!& it would co%prise the "ollowing topics.contents& ,ntroduction o" the ordinance ,%portant statutory de"initions /or%s o" $usiness in which $anking co%panies %ay engage ;egulations regarding Paid- up capital+ :u$scri$ed capital and 4uthori2ed capital )lection o" new directors Cash reser!e Powers o" :tate $ank to control ad!ances $y $anking co%pany Licensing policy o" :tate Bank o" Pakistan >uidelines $y :tate Bank 4ccounts 0 $alance sheet Copyright Virtual ni!ersity o" Pakistan 1
Banking Laws and Practices-BNK 601 Power o" :tate Bank to re%o!e directors Prosecution o" directors+ chie" e9ecuti!e or other o""icers #ransaction o" $anking $usiness illegally $y co%panies+ etc( :uspension o" $usiness <inding-up o" $anking co%pany :pecial pro!isions "or speedy disposal o" winding up proceedings Banking -ohtasi$ Procedure "or %aking co%plaints to Banking -ohtasi$ Penalties Power o" "ederal go!ern%ent to %ake rules Banking co%panies rules+ 156?
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S&/ Act, -0.& it would co!er in detail the "ollowing topics.contents& )sta$lish%ent and incorporation o" the $anks -anage%ent Business and "unctions o" $anks :BP Banking :er!ices Corporation+ =rdinance+ @001 --Pakistan $anking 0 "inance ser!ices co%%ission 4ct+ 155@ -- #he co-operati!e societies and co-operati!e $anks 3re-pay%ent o" loans ordinance+ 15668 -- #he esta$lish%ent o" "ederal $ank "or co-operati!e and regulation o" co-operati!e $anking 4ct+ 1566 -- -icro "inance institutions =rdinance+ @001 -- #he corporate and industrial re-structuring corporation =rdinance+ @000 Module 1 &an$er + Customer relations)i(s: it would co!er in detail the "ollowing topics.contents& Banker and custo%er relationship 'e$tor and creditor relationship 4gency relationship Bailor- Bailee relationship -ortgagor--ortgagee ;elationship Pledger-pledgee relationship 2e s)all %ocus s(ecial attention on t)e %ollo'ing to(ics: Banker + custo%er + ;ights and 'uties o" Custo%er+ 'uties o" the 4gent+ ;ights o" the 4gent+ 'uties o" Principal+ )ssentials o" Bail%ent+ 'uties o" Bailee+ ;ights o" -ortgagee+ )ssentials o" a Valid Contract+ Classi"ication o" Contracts+ #er%ination o" Banker- Custo%er ;elationship( Module 0 T#(es o% Customer3s Account& it would co!er in detail the "ollowing topics.contents& =pening o" account Classi"ied account Partnership account 4ccount o" co%panies Aoint accounts #rust account 4ccounts o" e9ecutors. ad%inistrator Module . 4a' relating to Negotiable instruments: it would co!er in detail the "ollowing topics.contents& ,ntroduction 2 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 Pro%issory note Bill o" e9change Negotiation o" instru%ents Negotiation $y deli!ery Negotiation $y endorse%ent 1older in due course Presentation o" instru%ents Pay%ent and interest 'ischarge "ro% lia$ility Module 5 /rinci(les and "orms o% 4ending& it would co!er in detail the "ollowing topics.contents& Principles o" lending /or%s o" lending =!er dra"ts+ loans Securities %or Advances& it would co!er the "ollowing topics.contents& Pledge 1ypothecation -ortgage Module 6 Non+%unded %acilities& it would co!er the "ollowing topics.contents& 4etter o% credit 'e"inition o" letter o" credit ;e!oca$le and irre!oca$le credits #ypes o" letter o" credit =pening o" letter o" credit Negotiation o" letter o" credit ;ei%$urse%ent o" letter o" credit Rules regarding Non+%unded %acilities ni"or% custo%s and practices "or docu%entary credit 3 CP 6008 ni"or% ;ules "or Contract >uarantee ;C>-?@B ni"or% ;ules "or 'e%and >uarantee ;'>-7BC Module 7esigning o% legal documents: it would co!er in detail the "ollowing topics.contents& #er%ination o" the agree%ent+ -ortgage deed ;ede%ption deed ;ede%ption o" %ortgage Letter o" hypothecation Module 8 7esigning o% legal documents& it would co!er in detail the "ollowing topics.contents& 1ire- purchase agree%ent #er%ination o" the agree%ent -ortgage deed ;ede%ption deed ;ede%ption o" %ortgage Copyright Virtual ni!ersity o" Pakistan
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Banking Laws and Practices-BNK 601 Letter o" hypothecation /rudential regulations o% S&/& it would co!er in detail the "ollowing topics.contents& Regulations %or consumer %inancing - :tatutory 'e"initions - ;egulations - Classi"ications "or small and medium enter(rises %inancing - 'e"initions + ;egulations - Classi"ications /rudential regulations %or cor(orate9 commercial ban$ing - 'e"initions - ;isk %anage%ent - Corporate go!ernance Guidelines %or ban$s b# S&/& it would co!er in detail the "ollowing topics.contents& 'e"ining risk ;isk %anage%ent ;isk %anage%ent "ra%ework Managing credit ris$ Co%ponents o" credit risk %anage%ent -anaging pro$le% credits Managing mar$et ris$ )le%ents o" %arket risk %anage%ent ;isk %anage%ent co%%ittee Managing li:uidit# ris$ )arly warning indicators o" li*uidity risk Li*uidity risk strategy Managing o(erational ris$s =perational risk %anage%ent principles ;isk reporting Module "inancial institutions ; Recover# o% "inances< Ordinance, !88 : ,t would co!er in detail the "ollowing topics.contents& ,ntroduction 'e"initions )sta$lish%ent o" $anking court Power o" $anking court Procedure o" $anking court Lea!e to de"end ,nteri% decree Power to set aside decree 'isposal o" suit :ale o" %ortgage property 4ttach%ent $e"ore Dudg%ent Banking docu%ents )9ecution o" decree+ appeal 4 Copyright Virtual ni!ersity o" Pakistan
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Banking Laws and Practices-BNK 601 Module ! ,t would co!er the "ollowing topics& 4pplication o" li%itation 4ct+ 150C 4ncillary statutes Li%itation 4ct+ 150C :ta%p 4ct+ 1C55 4r$itration 4ct+ 1575 Contract 4ct+ 1C6@
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Besides te9t $ooks and re"erence $ooks+ su""icient reading %aterial shall $e a!aila$le in the "or% o" handouts( ,t is $elie!ed that students shall $e duly $ene"ited "ro% the %ultiple resources at their disposal(
Banking Laws and Practices-BNK 601 4EGA4 S=STEM O" /A>?STAN
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<e know that e!ery $ody around talks a$out law according to oneEs own perception( Be"ore studying the statutory pro!isions o" law+ interpretation and signi"icance o" law+ it is i%portant to know what law is all a$out( Law in general sense is de"ined as under& F#he law consists o" rules that regulate the conduct o" indi!iduals+ $usinesses+ and other organi2ations within societyG Signi%icance o% la' Law is to %aintain rights+ uphold Dustice and redress wrongs( Law ensures pu$lic order+ $alance+ har%ony+ peace a%ong the persons within the state and inter-states( <e can easily concei!e that in the a$sence o" law and legal syste% there would ha!e $een disorder+ unrest and chaos all around us( @uris(rudence /or understanding law+ we %ust ha!e preli%inary understanding o" Durisprudence( #he legal e9perts ter% ci!il law as science o" Durisprudence( :o%e concepts o" Durisprudence are gi!en $elow& FAurisprudence %eans the knowledge o" law+ or knowledge o" Dust and unDustG ,t deals with laws that are en"orcea$le $y the courts( >inds o% @uris(rudence #he Durisprudence has $een classi"ied as under& 4nalytical Aurisprudence 1istorical Aurisprudence )thical Aurisprudence Anal#tical juris(rudence ,t co!ers the "ollowing areas& ,t analyses the pre!alent law that is the principles o" law as e9ist now( ,t also studies theory o" legislation+ precedent and custo%s and study o" di""erent legal concepts such as property+ possession+ trust+ contract+ negligence etc Sco(e o% Anal#tical juris(rudence ,t analyses the $asic principles o" ci!il law+ it does not pay any attention to the e!olutionary process and their ethical aspects that is whether they are good piece o" law or otherwise( <e can say that analytical Durisprudence does not consider the historical and ethical aspects( ,ts scope can $e underlined as gi!en $elow& 4n analysis o" the law #reat%ent o" a co%ple9 idea or concept in its ele%entary su$-di!isions )9a%ination o" the relations $etween ci!il law and other "or%s o" law 4 study o" the legal source o" law 4n in!estigation o" the theory o" legislation+ precedent and custo% Classi"ication o" the entire $ody o" law with reasons thereo"( 4 treat%ent o" rights+ their kinds and classes+ their creation+ trans"er and e9tinction 'ealing with legal lia$ility+ its kinds+ e9tent and incidence #o in!estigate such legal concepts as property+ possession+ trust+ contracts+ persons+ acts+ intention+ %oti!e+ negligence( etc( Aistorical juris(rudence ,t studies history o" law and e!olution o" law o!er a period o" ti%e and also a%end%ents+ introduction o" new principles o" law( 6 Copyright Virtual ni!ersity o" Pakistan
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Sco(e o% Aistorical @uris(rudence: ,t studies the principles o" law in their origin and de!elop%ents that take place o!er a period o" ti%e( #his $ranch is not the sa%e thing as legal history( Et)ical juris(rudence ,t deals with the law that should $e in an ideal state( ,t lays down the di""erent purposes which should $e "ul"illed in an ideal state( ,t studies the %odi"ications in the e9isting law in order to achie!e these purposes and o$Dects( #he %ain o$Dect o" ethical Durisprudence is the attain%ent o" Dustice( Sco(e o% Et)ical @uris(rudence: )thical Durisprudence deals with the law in the ideal state with law as it should $e( Law e9ists to "ul"ill certain purposes( ,t is "or this $ranch o" Durisprudence to lay down what those purposes are and whether they are "ul"illed $y the law e9isting at any gi!en ti%e( ,t considers the %odi"ications necessary in the e9isting law so that it %ay "ul"ill the o$Dects "or which it e9ists( #he other two $ranches are concerned with an analysis o" the law as it is or as has $een without $eing concerned with its ade*uacy or inade*uacy( )thical Durisprudence has as its o$Dect the attain%ent o" Dustice( Advantages o% stud# o% juris(rudence #he "ollowing are the ad!antages o" studying this science& Aurisprudence is the Fgra%%ar o" lawG and teaches the lawyers and the legislatorHs proper use o" legal ter%s( ,t ensures ho%ogeneity and accuracy in legal phraseology( 4 person who has studies Durisprudence will $e a$le to study "oreign laws intelligently i" need $e+ Conce(ts9 7e%inition o% 4a' :o%e o" the de"initions.concepts "ro% the writings o" e%inent Durists are gi!en $elow& According to &lac$stone:++ FLaw signi"ies a rule o" action+ and is applied
indiscri%inately to all kinds o" actionG(
According to Aolland:++ FLaw re"ers to a general rule o" action+ taking cogni2ance only o" e9ternal acts en"orced $y a deter%inate authority+ which authority is hu%an+ and a%ong hu%an authorities is that which is per%anent in a political societyG( According to Aobbs F#he co%%ands o" hi% and the% that ha!e coerci!e powerG According to Austin F4 law is a rule o" conduct i%posed and en"orced $y the so!ereignG According to Salmond FLaw is the $ody o" principles recogni2ed and applied $y the :tate in the ad%inistration o" DusticeG
According to @o)n Ers$ine FLaw is the co%%and o" a so!ereign+ containing a co%%on rule o" li"e "or his su$Dects and o$liging the% to o$edienceG( According to 7e Montmorenc# Copyright Virtual ni!ersity o" Pakistan 7
Banking Laws and Practices-BNK 601 FCoercion is a weapon o" law which law has "orged+ $ut it is not the $asis o" law(G According to /ound FLaw is the $ody o" principles recogni2ed or en"orced $y pu$lic and regular tri$unals in the ad%inistration o" DusticeG According to 2ilson FLaw is that portion o" the esta$lished thought and ha$it which has gained distinct and "or%al recognition in the shape o" uni"or% rules $acked $y the authority and power o" >o!ern%ent(G According to Green FLaw is the syste% o" rights and o$ligations which the state en"orces(G
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According to 4ord Radcli%% FIou will not %istake %y %eaning or suppose that , depreciate one o" the great hu%an studies i" , say that we cannot learn Law $y learning Law( ," it is to $e anything %ore than Dust a techni*ue it is to $e so %uch %ore than itsel"J a part o" history and sociology+ a part o" ethics and a philosophy o" li"e Classi%ication o% 4a' #he law is classi"ied into the "ollowing $ranches& ,%perati!e Law - Physical or :cienti"ic Law - Natural or -oral Law ?m(erative 4a' T)e t)ree ingredients o% im(erative la' are eB(lained in detail ?m(erative la' is a general rule ,t is a rule o" general application as distinguished "ro% particular application( 4 rule which applies only to one indi!idual or one set o" circu%stances at a gi!en ti%e $ut ne!er a"terwards will not $e a rule o" i%perati!e law( #he rules o" conduct laid down $y a "ather "or the guidance o" his sonJ or $y a %aster "or his ser!ant+ though laid down $y a superior and en"orced $y physical "orce+ are not i%perati!e law+ $ecause they are not o" general application( =n the other hand+ KgeneralE does not %ean a$solutely general+ or applica$le to all( #hus tra""ic rules+ though applica$le to dri!ers o" !ehicles only+ are i%perati!e law+ "or they apply generally to all dri!ers( #he rules re*uiring %inisters or the President to take an oath on entering upon o""ice+ though applica$le to a "ew or e!en one indi!idual "or% part o" i%perati!e law "or the oath is to $e taken $y President a"ter President+ -inister a"ter -inister+ etc( thus F>eneralG here signi"ies the "act that where!er a particular set o" circu%stances co%es into e9istence+ the rule should $e in!aria$ly applica$le+ with e9ception L though the one a""ected %ay $e an indi!idual 3the -inister8 or to class o" persons 3 the dri!ers o" !ehicles8( ?m(erative la' )as some aut)orit# be)ind it: ,t is gi!en $y so%e superior+ %ay $e hu%an or di!ine( )!ery rule o" i%perati!e law is gi!en $y so%e authority Lwhether di!ine or religious or political( ?m(erative la' is en%orced b# su(erior (o'er: #here %ust $e so%e punish%ent on $reach o" i%perati!e law( ;ules o" i%perati!e law are en"orced $y so%e superior power+ and the punish%ent takes such "or% as $odily or %ental su""ering( #he superior en"orces it $y either physical "orce or any other "or% o" co%pulsion+ such as ridicule+ conte%pt or 8 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU censure( #hose su$Dect to i%perati!e law are $ound to "ollow itJ thus co%pulsion is necessary( 4 rule which people %ay or %ay not o$ser!e cannot "or% a part o" i%perati!e law( ?llustrations 7ivine la' is i%perati!e law on the "ollowing $asis& 3i8 ,t is laid down $y a superior authority 3>od8J 3ii8 ,t is "ollowed co%pulsorilyJ 3iii8 ,ts $reach constitutes a sin and is punished with di!ine wrath( Civil la' 3the law o" the land8 is also a "or% o" i%perati!e law on the "ollowing $asisJ --#he superior power is the so!ereign --the co%pulsion is "ear o" punish%ent $y the state( --it is en"orced $y the physical "orce o" the state( Ci!il law decides whether an act is innocent or cri%inal( ?nternational 4a' ,nternational law has $een di""erently de"ined $y di""erent Durists( :al%ond takes it as Fthose rules which go!ern so!ereign states in their relations and conduct towards each otherG( =ther de"initions are& F the $ody o" rules which $y custo% or treaty ci!ili2ed states regard as $inding upon the%sel!es in their relations with one another+ and whose !iolation gi!es the inDured party a legal right to redressGJ 3 <heaton8+ F#he aggregate o" rules to which nations ha!e agreed to con"or% in their conduct towards one anotherGJ 3Lord ;ussel8( Sources o% la' 4ccording to :al%ond+ "ollowing are the %ain sources& - "ormal sources - Material sources "ormal Sources /or%al sources are co%prised o" statutes and decision o" the courts( Material sources -aterial sources are co%prised o" legal sources and historical sources( Legal sources are co%prised o" the "ollowing& - Legislation - Precedent - Custo%s - 4gree%ent #he %ain instru%ents under the legal sources are legislation and precedent( /irst o" all Precedent is e9plainedC /recedent or Case 4a': #he decisions %ade $y superior Dudiciary contain interpretation o" law are called case law or precedents( #he decisions can $e relied upon.cited as precedents in "uture at the ti%e o" adDudication o" the cases( /rinci(les o% binding (recedent are underlined belo' + #he decision relied upon %ust $e $ased upon the interpretation o" law( -#he precedent %ust ha!e ne9us to the central point o" the case( - #he "acts o" the precedent $eing cited and the case $eing adDudicated upon %ust $e the si%ilar(
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Sources of Law
Formal Sources
Material Sources
Legal Sources
Historical Sources
Legislatio n
/rocess o% legislation
Preceden t
Customs
Agreement
/arliament: 4a'9 statutes are made b# t)e (arliamentC ,t is also called legislature and consists o"+ National 4sse%$ly+ :enate and President o" Pakistan( /rocess o% legislationDEB(lained Parlia%ent."ederal legislature has $een gi!en powers to %ake laws $y the constitution o" Pakistan 3156?8 7th schedule in two lists that is& 4 $ill can $e presented in either house whether national asse%$ly or senate and a"ter $eing passed $y si%ple %aDority shall $e trans%itted to other house( <hen the $ill is passed $y $oth houses o" the parlia%ent+ it is then presented to the president "or assent( ," the $ill presented to President is not gi!en assent or sent $ack to the parlia%ent "or any a%end%ents+ it will $e considered in the Doint sitting o" the $oth houses o" the parlia%ent and i" passed shall $e again presented to the President "or his assent( Now the $ill will $eco%e the act o" parlia%ent and president does not ha!e powers to withhold assent( #he $ill when passed $y the parlia%ent is called an Act( Mone# &ills -oney $ill shall originate in the national asse%$ly and a"ter $eing passed shall $e presented to the president "or assent( -oney $ill shall not $e presented to the senate( #he rest o" the procedure is the sa%e as e9plained a$o!e( Ordinance nder the constitution o" Pakistan+ the President can pro%ulgate an ordinance+ i" any house o" parlia%ent is not in session( #he ordinance shall stand repealed a"ter one hundred twenty days+ i" it is not presented or passed $y the parlia%ent( #he process o" legislation has also $een e9plained through a "igure on ne9t page(
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Process of Legislation
When National Assembly is not in Session
When National Assembly is in Session

All Othe" !ills
oney !ill
#"esi$ent
National Assembl y Senat e
O"$inan'e
%e&e't
#"esi$en t Assen t
Act/Law
Sent for reconsideration to Parliament (Joint sitting of National Assembly and Senate
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"?NANC?A4 S=STEM E &AN>?NG "inancial S#stem Co%plete and co%ple9 e!er changing set o" rules+ regulations+ procedures+ practices policies+ conductsJ role o" institutions 3"inancial institution8+ >o!ern%ents+ Policy %akers and central $ank taken together %ay $e called "inancial syste%( #he "inancial syste% does ha!e its i%pacts on indi!iduals+ $usinesses+ corporations and go!ern%ents alike( 4t ti%es in your li"e+ you will $e a sa!er and at other ti%es+ you %ay $e a $orrower( #he "inancial syste% channels "unds "ro% sa!ers to $orrowers and %akes it possi$le "or $oth to achie!e their o$Decti!es( <hen the "inancial syste% works e""iciently+ it leads to $etter health o" the econo%y( /ur(ose o% t)e %inancial s#stem -ost o" us at one ti%e or another %ay need %ore "unds than you ha!e on hand "or one purpose or another( 4t the sa%e ti%e+ others spend Aess than their inco%es( #hose who ha!e surplus "unds %ay $e willing to let so%eone else use their sa!ings i" they are co%pensated "or doing so( #he %is%atch o" inco%e and spending "or indi!iduals and organi2ations . creates an opportunity to trade( #he in!estor can use the "unds sa!ed $y di""erent classes o" people( #he in!estor would $e $etter o"" $y earning a pro"it "ro% in!esting "unds in a new !enture and sa!ers who ha!e lent their %oney would $e $etter o"" H$y recei!ing the return that the in!estor pays the% "or lending their "unds( Now we can easily understand the "unctions pro!ided $y the "inancial syste% in an econo%y( ,t %o!es "unds "ro% those who want to spend less than they ha!e a!aila$le to those who ha!e a desire to purchase dura$le goods or those who ha!e producti!e in!est%ent opportunities( #his %atching process increases the econo%yHs a$ility to produce goods and ser!ices( ,n addition+ it %akes households and $usinesses $etter o"" $y allowing the% to ti%e purchases according to their needs and desires( 4 s%oothly "unctioning "inancial syste% thus i%pro!es the econo%yHs e""iciency and peopleHs econo%ic wel"are( #he "inancial syste% pro!ides channels to trans"er "unds "ro% indi!iduals and groups who ha!e sa!ed %oney to indi!iduals and groups who want to $orrow %oney( :a!ers 3or lenders8 are suppliers o" "unds+ pro!iding "unds to $orrowers in return "or pro%ises o" repay%ent o" e!en %ore "unds in the "uture( T)e %inancial s#stem brings toget)er savers and borro'ers in %ollo'ing t'o 'a#sC 7irect "inance ,n direct "inance+ indi!idual sa!ers through "inancial %arkets hold the clai%s issued $y indi!idual $orrowers( ?ndirect "inance ,n indirect "inance indi!idual sa!ers through "inancial inter%ediaries hold clai%s o!er the port"olio o" assets o" the $orrowers( /inancial %arkets pro!ide play "ield to the "inancial instru%ents( /inancial instru%ents are traded $y household+ $usiness "ir%s+ go!ern%ent and "oreigners in wide !ariety o" "inancial %arkets or %arkets "or "inancial instru%ents( /inancial %arket can at preli%inary stage $e ter%ed as %arket "or $onds and stock %arkets( "unctions o% "inancial Mar$ets and "inancial ?ntermediaries #he "unction is e9plained through the "ollowing "igure&
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?ndirect "inance
"inancial ?ntermediaries
/unds
"unds
"unds
4ender+Savers:
Aouse)oldsC &usiness "irmsC GovernmentC "oreigners(
&orro'er S(enders: "inancial Mar$et 7irect "inance

iC iiC iiiC
i!(
&usiness "irmsC GovernmentC Aouse)olds "oreigners(
#hose who ha!e sa!ed and lending "unds+ the Lender :a!ers are at the le"t side 0 those who %ust $orrow "unds to "inance their spending+ the Borrower-:penders are at the right( #he arrows show that /unds "low "ro% lender sa!ers to Borrower L spenders !ia two routes i(e(J through "inancial %arkets 3'irect /inance8 and through /inancial inter%ediaries i(e( Banks etc( 3,ndirect /inance8 ,n direct "inance $orrowers $orrow "unds directly "ro% lenders in "inancial %arkets $y selling the% securities or $onds which are clai% on $orrowersE "uture inco%e or assets( T#(es o% "inancial Mar$ets /inancial %arkets are di!ided as under& 1( /oreign e9change %arket( @( :tock %arket( ?( Bond %arket( /inancial %arkets are one arena in which sa!ersE surpluses are trans"erred to $orrowers( :a!ers can $uy stocks and Bonds and Business $orrowers can o$tain "unds $y issuing stocks and Bonds "inancial ?nstitutions: ;Global /ers(ective< /inancial institutions are also called /inancial ,nter%ediaries+ these include the "ollowing& Co%%ercial Banks Credit nions :a!ings and Loan 4ssociations -utual :a!ing Banks -utual /unds /inance Co%panies Pension /unds etc( #he role o" /inancial ,nstitution is to act as /inancial ,nter%ediary or to pro!ide "unction o" /inancial ,nter%ediation+ role o" go-$etween "or sa!ers and $orrowers( Banks are the largest "inancial inter%ediaries( Banks lend to %any sectors o" the econo%y( Copyright Virtual ni!ersity o" Pakistan 13
Banking Laws and Practices-BNK 601 VU 1owe!er+ $anks and other "inancial institutions co%pete with one another and this co%petition has ad!antage "or sa!ers+ $orrowers and syste% as a whole( >e# Services /rovided b# "inancial ?nstitutions ,n addition to %atching indi!iduals who ha!e e9cess "unds with chose who need the%+ the "inancial syste% pro!ides three key ser!ices "or sa!ers and $orrowers( #hese ser!ices are risk sharing, liquidity, and information. /inancial %arkets and "inancial inter%ediaries pro!ide these ser!ices in di""erent ways+ %aking !arious "inancial assets and "inancial lia$ilities %ore attracti!e to indi!idual sa!ers and $orrowers( -any "inancial decisions %ade $y sa!ers and $orrowers are shaped $y the a!aila$ility o" these ser!ices( Ris$ S)aring =ne ad!antage o" using the "inancial syste% to %atch indi!idual sa!ers and $orrowers is that it allows the sharing o" risks( Risk is the chance that the !alue o" "inancial assets will change relati!e to what you e9pect( -ost indi!idual sa!ers are not ga%$lers and would like to seek a steady return on their assets rather than erratic swings $etween high and low earnings( ,ndeed+ indi!iduals pre"er sta$le returns on the collection o" assets they hold( 4 collection o" assets is called a port"olio( /or e9a%ple+ you %ight hold so%e go!ern%ent treasury securities+ so%e shares o" stock+ and so%e shares in a %utual "und( 4lthough one asset or set o" assets %ay per"or% well and another %ay not per"or% as well+ $ut o!erall returns tend to a!erage out( #his splitting o" wealth into %any assets is known as di!ersi"ication( 4s long as the indi!idual returns do not !ary in the sa%e way+ the risk o" se!ere "luctuations in a port "olioHs !alue will $e reduced( #he "inancial syste% pro!ides risk sharing $y allowing sa!ers to hold %any assets( ( 4i:uidit# #he second ser!ice+ the "inancial syste% o""ers to sa!ers and $orrowers is li*uidity+ which is the ease with which an asset can $e e9changed "or %oney to purchase other assets or e9changed "or goods and ser!ices( :a!ers !iew the li*uidity o" "inancial assets as a $ene"it( <hen they need their assets "or their own consu%ption or in!est%ent+ they can e9change the% easily( ,n general+ the %ore li*uid an asset+ the easier it is to e9change the asset "or so%ething else( Iou can eas ily e9change the currency notes "or purchasing a $ook or anything else $ecause it is highly li*uid( Iou can also cash a check within a short period o" ti%e to $uy clothes( 1owe!er+ selling a car would take %ore ti%e $ecause personal property is not !ery li*uid( By holding "inancial clai%s 3such as stock or $onds8 on a "actory+ indi!idual in!estors ha!e %ore li*uid sa!ings than they would i" they owned the %achines in the "actory( #he reason is that the in!estor can %ore easily sell the clai% than a speci"ic %achine in order to $uy other assets or goods( Li*uid assets allow an indi!idual or "ir% to respond *uickly to new opportunities or une9pected e!ents( /inancial assets created $y the "inancial syste%+ such as stocks+ $onds+ or checking accounts+ are %ore li*uid than cars+ %achinery+ or real estate( /inancial %arkets and inter%ediaries pro!ide trading syste%s "or %aking "inancial assets %ore li*uid( ,n addition to creating "inancial assets+ the "inancial syste% pro!ides %echanis% "or increasing the li*uidity o" "inancial assets( ,n!estors can readily sell their holdings in go!ern%ent securities and stocks and $onds o" large corporations+ %aking those assets !ery li*uid( 'uring the past two decades+ the "inancial syste% has %ade %any other assets li*uid $esides stocks and $onds( =ne %easure o" the e""iciency o" the "inancial syste% is the e9tent to which it can trans"or% illi*uid assets into the li*uid clai%s that sa!ers want( ?n%ormation 4 third ser!ice o" the "inancial syste% is the collection and co%%unication o" in"or%ation+ or "acts a$out $orrowers and e9pectations a$out returns on "inancial assets( #he "irst in"or%ational role the "inancial syste% plays is to gather in"or%ation( #hat includes "inding put a$out prospecti!e $orrowers and what they will do with $orrowed "unds( =$taining such in"or%ation would $e costly and ti%econsu%ing "or sa!ers+ who o" course want all the "acts $e"ore lending their %oney( <orking through the "inancial syste%+ a prospecti!e in!estor is likely to learn %ore a$out the $orrower than he would i" he tried to %ake the in!est%ent on his own( 14 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU 4nother pro$le% that e9ists in %ost transactions is asy%%etric in"or%ation( #his %eans that $orrowers possess in"or%ation a$out their opportunities or acti!ities that they donHt disclose to lenders or creditors and can take ad!antage o" this in"or%ation( :o%eti%es+ "inancial arrange%ents ha!e to $e structured so that $orrowers do not take ad!antage o" asy%%etric in"or%ation at the e9pense o" lenders( #he "inancial syste% speciali2es in in"or%ation gathering and %onitoring+ and arrange%ents e9ist "or sol!ing pro$le%s o" asy%%etric in"or%ation(M #he second in"or%ational role the "inancial syste% plays is communication o% in%ormationC :a!ers and $orrowers recei!e the $ene"its o" in"or%ation "ro% the "inancial syste% $y looking at asset returns( 4s long as "inancial %arket participants are in"or%ed+ the in"or%ation works its way into asset returns and prices( ,n"or%ation is co%%unicated to $orrowers as well as to sa!ers( #he incorporation o" a!aila$le in"or%ation in asset returns is the distinguishing "eature o" well-"unctioning "inancial %arkets( Structure o% "inancial Mar$et /inancial %arkets are categori2ed as under& - 'e$t and e*uity %arkets( - Pri%ary -arkets and secondary %arkets( - )9change %arkets and o!er-the-counter %arket( 3=#C8 - /orward contracts and "uture %arkets( 7ebt and E:uit# Mar$ets 'e$t instru%ents such as issuing $onds( #hese %ay $e short ter% 3-aturity less than one year8+ longter% 3%aturity ten year or longer8 and inter%ediate ter% 3%aturity $etween one and ten years8( :econd %ethod o" raising "unds is $y issuing e*uities /rimar# Mar$et and Secondar# Mar$ets Pri%ary -arket is a "inancial %arket in which new issues o" a security such as Bonds or stocks are sold to initial $uyers whereas in secondary -arkets there is "urther sale o" already issued securities( EBc)ange and Over+t)e+Counter Mar$ets :econdary -arkets can $e organi2ed in the "ollowing ways& #hrough organi2ing.esta$lishing :tock )9change through =!er-the-Counter 3=#C8 %arkets+ 3'ealers in these %arkets are in co%puter contact and know the prices set $y one another+ =#C %arkets are !ery co%petiti!e( Mone# Mar$et and Ca(ital Mar$et -oney -arket is a "inancial %arket which deals in short ter% de$t instru%ents( Capital %arket deals in long ter% de$t instru%ents "or'ard Contracts and "utures Mar$et nder /orward Contract+ $uyers and.sellers agree to trade certain *uantity o" co%%odity "or a speci"ic price at a speci"ied date in "uture+ contracts are "or%ally %ade in co%%odities e9change %arkets( "inancial Regulations ;especti!e >o!ern%ents regulate "inancial %arkets and "inancial institutions around the world+ which is necessary "or the %aintenance o" "inancial sta$ility+ $uild con"idence o" all stake holders in the syste%( #here are also international nor%s+ practices and protocols which are re*uired to $e o$ser!ed $y all participants+ trading across the $orders such as ni"or% custo%s and practices "or docu%entary credits 3 CP 6008
15
Banking Laws and Practices-BNK 601 "?NANC?A4 ?NSTRUMENTS E &AN>?NG 4A2S E /RACT?CES
VU LESSON 4
"inancial ?nstruments <e ha!e discussed "inancial syste% and "inancial institutions+ now shall %o!e on to "inancial instru%ents( /inancial instru%ents are the !ehicles $y which "inancial %arkets channel "unds "ro% sa!ers to $orrowers and pro!ide returns to sa!ers( <e shall discuss %aDor instru%ents or securities+ traded in the "inancial syste%( /or con!enience+ we analy2e %oney %arket and capital %arket instru%ents separately( Both %oney %arket and capital %arket assets are acti!ely traded in "inancial %arkets( Mone# Mar$et ?nstruments #he short %aturity o" %oney %arket assets doesnHt allow %uch ti%e "or their returns to !ary( #here"ore these instru%ents are sa"e in!est%ents "or short-ter% surplus "unds o" households and "ir%s( 1owe!er+ ill %aking in!est%ent decisions+ sa!ers %ust still consider the possi$ility o" de"aultNthe chance that the $orrower will $e una$le to repay the entire a%ount $orrowed plus interest at %aturity( Government Treasur# &ills >o!ern%ent #reasury securities are short-ter% de$t o$ligations o" the go!ern%ent( #hey are also the %ost li*uid %oney %arket instru%ent $ecause they ha!e the largest trading !olu%e( #he "ederal go!ern%ent can raise ta9es and issue currency to repay the a%ount $orrowed+ so there is !irtually no risk o" de"ault( #reasury securities with %aturities o" less than one year are called #reasury $ills 3#$ills8( 4lthough indi!iduals can hold the%+ the largest holders o" #-$ills are co%%ercial $anks+ "ollowed $y other "inancial inter%ediaries+ $usinesses+ and "oreign in!estors( &ill o% eBc)ange and ot)er Commercial /a(ers Co%%ercial paper pro!ides a li*uid+ short-ter% in!est%ent "or sa!ers and a source o" "unds "or corporations( 1igh-*uality+ well-known "ir%s and "inancial institutions use co%%ercial paper to raise "unds( Because these $orrowers are generally the %ost creditworthy+ the de"ault risk is s%all+ $ut the interest rate is higher than that on #reasury $ills( #he growth in the co%%ercial paper %arket during the past two decades is part o" a shi"t $y %any corporations toward direct "inance 3and away "ro% $ank loans8( &ill o% eBc)ange 7e%ined and EB(lained ,t is an i%portant "or% o" a negotia$le instru%ent and has $een de"ined in section B o" the Negotia$le ,nstru%ents 4ct+ 1CC1 the said de"inition is reproduced $elow& F4 $ill o" e9change is an instru%ent in writing containing an unconditional order+ signed $y %aker+ directing a certain person+ to pay on de%and or at "i9ed or deter%ina$le "uture ti%e a certain su% o" %oney only to+ or to the order o"+ a certain person or to the $earer o" the instru%entG( #he "ollowing are the ingredients o" a $ill o" e9change& 1( ,t %ust in writing @( ,t %ust contain an order to pay and addressed to so%e person ?( #he order %ust $e unconditional 7( #he order %ust $e signed $y the %aker B( #he order %ust direct to pay or de%and or at a "i9ed or deter%ina$le "uture ti%e( 6( #he su% ordered to $e rapid %ust $e certain( 6( #he pay%ent should $e ordered to $e paid to a certain person+ or to his order+ or to the $earer( EB(lanation o% di%%erent %eatures o% a bill o% eBc)ange 4 pro%ise or order to pay is not Fconditional+ within the %eaning o" this section and section 7+ $y reason o" the ti%e "or pay%ent o" the a%ount or any install%ent thereo" $eing e9pressed to $e on the lapse o" a certain period a"ter the occurrence o" a speci"ied e!ent which+ according to the ordinary e9pectation o" %ankind+ is certain to happen+ although the ti%e o" its happening %ay $e uncertain( 16 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU #he su% paya$le %ay $e FcertainG within the %eaning o" this section and section 7+ although it includes "uture interest or return in any other "or% or is paya$le at an indicated rate o" e9change+ or is paya$le at the current rate o" e9change and although it is to $e paid in stated install%ents and contains a pro!ision that on de"ault o" pay%ent o" one or %ore install%ents or interest( =r return in any other "or% the whole or the unpaid $alance shall $eco%e due( 4 pro%ise order to pay is not KconditionalE nor is the su% paya$le uncertain within the %eaning o" this section or section 7 $y reason o" the su% paya$le $eing su$Dect to adDust%ent "or pro"it or loss+ as the case %ay $e o" the $usiness o" the %aker( <here the person intended can reasona$ly $e ascertained "ro% the pro%issory note or the $ill o" e9changeJ he is a Kcertain personE within the %eaning o" this section and section 7+ although he is %isna%ed or designated $y description only( 4n order to pay out o" a particular "und is not unconditional within the %eaning o" this sectionJ $ut an un*uali"ied order to pay+ coupled withN ;a< an indication o" a particular "und out o" which the drawee is to rei%$urse hi%sel" or a particular account to $e de$ited to the a%oun+ or O ;b< a state%ent o" the transaction which gi!es rise to the note o" $il+ in unconditional 4n essential character o" a $ill o" e9change is that it shall contain an order to accept or to pay and that acceptor should accept it+ in the a$sence o" such a direction to pay the docu%ent will not $e a $ill o" e9change or a hundi( &an$ersF Acce(tances #hese instru%ents are designed to "acilitate international trade+ $ankersH acceptances are instru%ents that esta$lish credit $etween parties who do not know each other( 4 $ankerHs acceptance is a check like pro%ise that the $ank will pay the a%ount o" "unds indicated to the recipient( ,t is issued $y a "ir% 3usually an i%porter8 and is paya$le on a date indicated( #he $ank that %arks the dra"t MacceptedM guarantees the pay%ent to the recipient 3usually an e9porter or its representing $ank8( #he issuing "ir% is re*uired to deposit "unds in the $ank su""icient to co!er the dra"tJ i" it does not do so+ the $ank is still o$ligated to %ake good on the dra"t( #he $ankHs good na%e is likely to ena$le an i%porter to $uy goods "ro% an o!erseas e9porter that lacks knowledge a$out whether the i%porter will $e a$le to pay( ,n recent years+ acceptances ha!e generally $een resold in :econdary %arkets and held $y other $anks+ households+ and $usinesses( Re(urc)ase Agreements, ;epurchase agree%ents+ also known as repos or ;Ps+ are used "or cash %anage%ent $y large corporations( #hey are !ery short-ter% H loans+ typically with %aturities o" less than two weeks( ,n %any cases+ a "ir% gi!es %oney as loan to a $ank o!ernight( /or e9a%ple+ i" a large co%pany has idle cash+ it purchases #-$ills "ro% a $ank that agrees to $uy the% $ack the ne9t %orning at a higher price+ re"lecting the accu%ulated interest( #he #-$ills ser!e as collateralJ that is+ i" the $orrower de"aults+ the+ lender recei!es the #-$ills( "ederal ;"ed< "unds ;in UCS /ers(ective< /ederal "unds instru%ents represent o!ernight loans $etween $anks o" their deposits with the /ederal ;eser!e :yste% 3the (:( central $ank8( Banking regulations re*uire that $anks deposit a percentage o" their deposits as reser!es with the /ed( ," a $ank is te%porarily low on reser!es+ it can $orrow "unds "ro% another $ank that has reser!es greater than the re*uired le!el( #he "ederal "unds %arket re"lects the credit needs o" co%%ercial $anks+ so %oney %arket analysts watch the "ederal "unds rate 3the interest rate Ocharged on these o!ernight loans8 closely( <hen it is high+ $anks need additional "undsJ when it is low+ $anks ha!e low credit needs Eurodollars )urodollars are (:( dollars deposited in "oreign $ranches o" (:( $anks or in "oreign $anks outside the nited :tates 3not necessarily in )urope8( ;ather than $eing con!erted into the currency o" the "oreign country+ the deposits re%ain deno%inated in dollars( (:( $anks can then $orrow these "unds( )urodollar "unds raised a$road ha!e $eco%e an i%portant source o" "unds "or (:( $anks( Copyright Virtual ni!ersity o" Pakistan 17
VU
Negotiable &an$ Certi%icates o% 7e(osit 4 certi"icate o" deposit 3C'8 is a "i9ed-%aturity instru%ent sold $y a $ank to depositorsJ it pays principal and interest to the certi"icate holders( #his is an 4%erican ter%inology "or ter%s deposits( Ca(ital Mar$et ?nstruments :ince capital %arket instru%ents ha!e longer %aturities than %oney %arket instru%ents+ they are su$Dect to greater "luctuations in their returns( /or this reason+ $orrowers who seek to use "unds "or a long period o" ti%e and sa!ers with long in!est%ent hori2ons in!est in the%( 4ll capital %arket de$t instru%ents contain so%e risk o" de"aultJ howe!er+ since go!ern%ent securities are $acked $y so!ereign undertaking hence carry little risk( Government Treasur# Securities :ecurities and $onds are issued $y the go!ern%ent to "inance $udget de"icits such as /ederal ,n!est%ent Bonds issued $y >o!t( o" Pakistan with %aturity o" B to 10 years( #hese are traded through :tock )9change+ hence li*uidity is ensured( UCSC Government Agenc# Securities ;?n UCS /ers(ective< (:( go!ern%ent agency securities are inter%ediate-ter% or long-ter% $onds issued $y the "ederal go!ern%ent or go!ern%ent-sponsored agencies( /or e9a%ple+ the /ar% Credit :yste% issue $onds to raise %oney to "inance agricultural acti!ities+ and the >o!ern%ent National -ortgage 4ssociation 3>N-48 issues $onds to "inance ho%e %ort gages( -any such securities are o""icially guaranteed $y the go!ern%ent 3with a pledge o" the go!ern%entHs M"ull "aith and creditM8J others+ are i%plicitly guaranteed+ so the de"ault risk is still low( State and 4ocal Government &onds issued in United States :tate and local go!ern%ent $onds 3o"ten called %unicipal $onds8 are inter%ediate-ter% or long-ter% $onds issued $y %unicipalities and state go!ern%ents( #hese go!ern%ental units use the "und $orrowed to $uild schools+ roads+ and other large capital proDects( #he $ond are e9e%pt "ro% "ederal inco%e ta9ation 3and also inco%e ta9ation $y the issuing state8( #hese $onds are o"ten held $y high-ta9-$racket households+ co%%ercial $anks+ and li"e insurance co%panies( Stoc$s :tocks are issued as e*uity clai%s $y corporations and represent the largest single category o" capital %arket assets( Cor(orate &onds Corporate $onds are inter%ediate-ter% and long-ter% o$ligations issued $y large+ high-*uality corporations to "inance plant and e*uip%ent spending( #ypically+ corporate $onds pay interest twice a year and repay the principal a%ount $orrowed at %aturity( #here are %any !ariations+ howe!er( Con!erti$le $onds+ "or e9a%ple+ allow the holder to con!ert the de$t into e*uity 3"or a speci"ied nu%$er o" shares8( By using such !ariations+ "ir%s can so%eti%es lower their $orrowing costs $y gi!ing $ond $uyers an e9tra return i" the "ir% does e9ceptionally well( Corporate $onds are not as li*uid as go!ern%ent securities $ecause they are less widely traded( Corporate $onds ha!e greater de"ault risk than go!ern%ent $onds+ $ut they generally "luctuate less in price than corporate e*uities( 4lthough the corporate $ond %arket is s%aller than the stock %arket in the nited :tates+ it is %ore i%portant "or raising "unds $ecause corporations issue new shares in"re*uently( -ost "unds raised through "inancial %arkets take-the "or% o" corporate $onds( ,n!estors in corporate $onds are a di!erse group+ including households+ li"e insurance co%panies+ and pension "unds( Mortgages -ortgages are loans 3usually long-ter%8 to households or $usinesses to purchase $uildings or land+ with the underlying asset 3house+ plant+ or piece o" land8 ser!ing as collateral( ;esidential %ortgages are 18 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU issued $y co%%ercial $anks( -ortgage loans "or industrial and agricultural $orrowers are %ade $y li"e insurance co%panies and co%%ercial $anks( Commercial &an$ 4oans Co%%ercial $ank loans include loans to $usinesses and consu%ers %ade $y $anks and "inance co%panies( :econdary %arkets "or co%%ercial $ank loans are not as well de!eloped as those "or other capital %arket instru%ents+ so loans are less li*uid than %ortgages( 2A/7A &ond ,t is an instru%ent o" capital %arket in Pakistan( ,t ser!es as source o" "unds to this institution Bonds in general are issued as e*uity clai%s on corporations and represent largest single category o" capital %arket assets( 7ebentures: ;Cor(orate &onds< +++ Global /ers(ective #hrough de$entures inter%ediate-ter% and long-ter% loans are raised $y the co%pany o" strong credit rating( An Overvie' o% &an$ing 4a's E /ractices #here are di""erent laws. statutes pro%ulgated $y the legislature( #here are also laws. statutes relating to $anks and $anking $usiness( :o%e o" the statutes relating to $anking and other "ields are stated $elow "or re"erence purposes& - Banking Co%panies =rdinance - Negotia$le ,nstru%ent 4ct - Li%itation 4ct - 4r$itration 4ct - Cri%inal Procedure Code( 3CrPC8 - Ci!il Procedure Code 3CPC8 - Contract 4ct( - :ales #a9 4ct 2)at is ban$ing (racticeG 4 $anking practice re"ers toE nor%al $anking practiceE carried on o!er a long period o" ti%e( :uch nor%al $anking practices carry the sanctity o" law and courts do recogni2e such practices while deciding cases( Banking practices are co%pli%entary to law not contradictory to law( Some o% &an$ing /ractices :ecrecy concerning custo%erEs a""airs& 4 $anker is re*uired to %aintain secrecy o" its custo%ers account howe!er under special circu%stancesJ $anker %ay produce state%ent o" account under so%e statutory re*uire%ents to a court o" law or to authori2ed persons. depart%ent( )9change o" inter-$ank credit reports is one o" the glo$al $anking practices( &an$er3s Rig)t o% Set+O%%: Law entitles $anks to setNo"" its clai%s "ro% custo%er credit $alances( 1owe!er+ courts ha!e "or%ulated rules+ which re*uire $usiness nor%s to $e "ollowed as well( Sa%e+Custod# Services ;4oc$ers "acilit#< #his relationship is go!erned $y the law o" $ail%ent( 3Legal relationship o" Bailer and Bailee is esta$lished $etween the custo%er and the $anker while a!ailing lockers "acility8( Courts while adDudicating cases also pay due consideration to nor%al $anking practices( Banking Practice o" Closing a Custo%erEs 4ccount under /ollowing Circu%stances& - /re*uently drawing che*ues without su""icient $alance in the drawerEs account( - 'epositing che*ues "or collection which are "re*uently returned uncollected( Copyright Virtual ni!ersity o" Pakistan 19
Banking Laws and Practices-BNK 601 - ,ssue che*ues and then issue stop-pay%ent instruction to the $ank(
VU
Banks %ay close account o" such custo%ers a"ter issuing reasona$le notice( /ro% the a$o!e discussion+ we can conclude that in $anking statutory pro!isions and $anking practices %o!e side $y side( ,t is i%portant to understand that $anking practices are co%pli%entary to law these are in no case contradictory to law( Law shall always pre!ail o!er practices(
20
Banking Laws and Practices-BNK 601 EVO4UT?ON O" &AN>?NG
VU LESSON 5
Aistorical Overvie' o% &an$ing Be"ore we %o!e on to e!olution o" $anking in Pakistan+ it would $e *uite interesting to ha!e a gli%pse o" historical e!olution o" $anking o!er a period o" ti%e( #oday+ we look around us chain o" $anks rendering host o" ser!ices to their custo%ers( #hese $anks cater to the co%%ercial and industrial needs o" all countries which include die highly de!eloped and industriali2ed countries+ the less de!eloped countries and the countries which are at the take-o"" stage( #hus there are the industrial $anks+ the co%%ercial $anks+ the Doint stock $anks+ the co-operati!e $anks+ the agricultural $anks+ rural de!elop%ent $anks+ lead $anks and so %any other types o" $anks and credit institutions which are "unctioning( #hey not only %eet the re*uire%ents on a national $asis+ $ut also on an international $asis and what %ay $e called as an e!er e9panding ad!ance%ent in $anking( #he Banks now-a-days are per"or%ing so %any "unctions that it would not $e a %isno%er to suggest that they ha!e $eco%e the custodian o" the %onetary econo%ies o" the world( <hen we talk o" great scienti"ic de!elop%ents and in!entions+ $anking as it stands today is also a wonder o" the world( Banking as we see today is the result o" e!olutionary de!elop%ent during the course o" centuries( ,t would also $e necessary to see how Banking has co%e to its present stage( #here has $een all round de!elop%ent in the world and the $anking today is not what it was in the earlier rudi%entary "or%( #o de!elop true perception+ we need to know as to in what %anner Banking today has co%e to $e what it is and in what %anner this transition has taken place( #he $anking syste%+ as it e9ists today+ is the product o" a nu%$er o" centuries and is not the de!elop%ent o" any particular period( ,n all the countries o" the world( Banking has $een in e9istence in one "or% or the other( :o "ar as the present syste% is concerned+ the word+ bank is said to $e o" >er%anic origin+ cognate with the /rench word banque and the ,talian word+ banca, $oth %eaning bench. ,n "act+ this word %ay ha!e deri!ed its %eaning "ro% the practice o" Aewish %oney-changers o" Lo%$ardy+ a 'istrict in North ,taly+ who+ in the %iddle ages+ used to do $usiness sitting on Benches in the %arket place( ,n case such an interpretation is pro!ided+ then it also "inds support "ro% a nu%$er o" other deri!ations o" the word such as the /rench word+ Bancjue Route and the ,talian word+ Banka Rotta, $oth o" which %ean Broken Bench( #his practice can $e understood i" we analy2e the situation when a %oney-changer "ailed and his $ench was $roken as a result o" his "ailure( Macleod, howe!er+ does not agree with this !iew and says+ "The ,talian %oney-changers as such were ne!er called Benchieri in the %iddle agesM( ,t %ay $e %ore correct to say that the word $ank is deri!ed "ro% the >er%an word back which %eans a Aoint :tock /und+ which was ,taliani2ed into Banco, when the >er%ans were %e %asters o" a %aDor part o" ,taly( Professor Ram Chandran Rao has said& Mwhate!er $e the origin o" the word bank, it would trace the history o" $anking in )urope "ro% the %iddle ages <hen we co%e to the ;o%an age+ the :tate Banks were not "unctioning $ut there were pri!ate $anks duly regulated $y the >o!ern%ent( ristotle stated that& MCharging o" interest on %oney was unnatural and i%%oral and on this account+ $anking could not de!elop "or so%eti%e(M ( <e should also re%e%$er that in ancient ti%es+ co%%ercial $anking was associated with the $usiness o" %oney-changing( #hey also %et the "inancial re*uire%ents o" the ruling go!ern%ent( dam !mith has stated as under& M#he earliest $anks o" ,taly+ where the na%e $egan+ were "inance co%panies((((( to %ake loans to and "loat loans "or the go!ern%ent o" cities in which they were "or%ed(((( 4"ter these $anks had $een long esta$lished+ they $egan to do what we call $anking $usiness+ $ut at "irst they ne!er thought o" it( Copyright Virtual ni!ersity o" Pakistan 21
Banking Laws and Practices-BNK 601 VU ,t was only in the 1@th century that the Banks+ in the %ode% sense o" the ter%+ were esta$lished in Venice and >ene!a+ which were doing the $usiness o" recei!ing deposits and lending %oney+ and were not only %oney-lenders( ,n /lorence alone+ there were a$out C0 $ankers known to the whole o" )urope such as Bardi+ -edici+ Peru22i and others o" great repute( #he Bank o" Venice "ounded in 11B6+ was the "irst Pu$lic Banking ,nstitution( #he Bank o" Barcelona and the Bank o" >ene!a were esta$lished in 1701 and 1706 respecti!ely and the Bank o" the Venice and the Bank o" >ene!a continued to operate until the end o" the 1Cth Century( #he pri!ate $anking houses such as the "a%ous house o" /uggers and 4ugs$urg enDoyed %ore e%inence than Peru22i and Bardi in the 17th Century and the -edici in the 1Bth Century in ,taly( #he $ankers o" Lo%$ardy settled in the locality which is now known as the "a%ous Lo%$ard :treet in London and to the% $elonged the credit o" planting the seed o" %ode% $anking in )ngland( Pu$lic $anks like the "a%ous Bank o" 4%sterda% was esta$lished in 1605 and these $anks helped in the de!elop%ent o" trade and co%%erce( #hese $anks recei!ed heterogeneous %etallic %oney and credited deposits in their $ooks which were trans"era$le through $ank che*ues( #hus+ the %ercantile pay%ents now $egan to $e settled $y %eans o" pay%ent through che*ues( ,n Britain+ people used to deposit their cash and $ullion at the ;oyal -int ha!ing "aith in the King and the royal "a%ily as an institution( "d#ard $$$ e9changed !arious "oreign coins and pro!ided "oreign e9change to the tra!elers and also supplied British %oney( #his "aith was $etrayed $y Charles $ in 1670 4('( $y capturing a !ery $ig a%ount o" P1+ ?0+000 $ullion le"t "or sa"e custody with the ;oyal -int( #he %erchants then started entrusting their !alua$les and cash to their cashiers+ who also %isappropriated the%+ and the %erchants took resort to golds%iths "or keeping custody o" !alua$les in their strong roo%s( #hese golds%iths used to gi!e receipts which were known as >olds%ithHs Note+ which was %ade paya$le to the $earer and on de%and which trans"or%ed the said receipt into the position o" a $ank-note which gained circulation and currency in due course o" ti%e( #hese notes with the passage o" ti%e $eca%e paya$le to the $earer on de%and and enDoyed circulation( #hus+ we can say that the golds%iths $eca%e the precursor o" the %odern+ $ank-note and the "ore-runners o" the %ode% $anking institutions( #hus the de!elop%ent o" $anking in )ngland was greatly helped $y the acti!ities o" the London golds%iths during the age o" Queen )li2a$eth L /or so%eti%e+ the deposits were %ade without interest( Later on+ the golds%iths tarred lending these a%ounts to others like that o" 'utch Bankers and when it was "ound pro"ita$le $y the%+ they started gi!ing interest on this %oney to their custo%ers instead o" charging any "ee "or sa"eguarding their %oney( #he golds%iths started gi!ing loans "or long duration and so%e %oney was kept $y the% "or daily pay%ents( #he trou$le arose when Charles %% under the Ca$al -inistry $orrowed hea!ily "ro% the% and repudiated all de$ts there $y the golds%iths as well as )nglish Banking recei!ed a rude set$ack( &alter Bagehot has stated that the go!ern%ent perpetrated one o" those %onstrous "rauds which are likewise gross $lunders( Charles $$ set up the )9che*uer( 1e would pay to none and as has $een stated $y 'eoffrey Cro#ther the golds%iths were ruined( 4s a result o" this+ there was the growth o" pri!ate $anks which "inally led to the esta$lish%ent o" the Bank o" )ngland in 1657( ,t is again interesting to re"er to 'eoffrey Cro#ther to trace the history o" %ode% )nglish $anking+ who has stated as under& M#he present-day $anker has three ancestors o" a particular note( =ne we ha!e already %etJ the %erchant+ whose high and widespread reputation or credit ena$les hi% to issue docu%ents that will $e taken all o!er the known world as titles to %oney( #o this day the title o" M%erchant $ankerG is reser!ed $y usage to the older cos%opolitan and %ore e9clusi!e pri!ate $anking "ir%s+ nearly e!ery one o" which can trace its ancestor to a trader in co%%odities+ %ore tangi$le 3though hardly %ore pro"ita$le8 than %oney( #he $ankerHs two other ancestors are the %oney-lenders and the golds%iths( Lending and $orrowing arc al%ost as old as %oney itsel" and the !illage %oney-lender is "ound e!en in *uite pri%iti!e co%%unities( 1e is not usually regarded as a !ery lo!ely o$DectJ usurer is one o" the oldest 22 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU ter%s o" a$use( But the ser!ices he per"or%s are undou$tedly use"ul and necessary+ e!en though the reward he e9tracts in return %ay usually $e rapacious((((( #he golds%ith ancestor o" the %odern $ank is purely an )nglish a""air( #he golds%iths were loosing their "aith and earned a $ad reputation "or so%eti%e and people dou$ted their bona fides. 1owe!er+ they started a new syste% o" ha!ing current account with the% and the $orrowers could withdraw %oney at any ti%e( #his was the stage which ga!e $irth later on to the present $anking syste%( #ill then+ there was no pu$lic $ank& #he Bank o" )ngland was started in 1657 4('( with its %onopoly o" issue o" notes( #here were Doint stock co%panies doing $anking $usinessand they were "lourishing in London( #hese co%panies introduced deposit $anking and che*ue currency and %any other ser!ices which a $ank can o""er( :o "ar as the Bank o" 4%sterda% is concerned+ it was one o" the greatest $anks o" the 16th century and its position was not less than the position which was held $y the Bank o" )ngland( ,n "act+ it had i%portance in the international world as a whole and one can get a good re"erence a$out the working o" these $anks "ro% lfred Marshal( who in his $ook+ M-oney+ Credit and Commerce, 15@?M+ has slated that these "a%ous $anks $esides+ acting as the "iscal agents "or the go!ern%ent+ were also responsi$le "or the counterpart o" such o" the work o" the %ode% stock e9changes( ,n "act+ these $anks acted as go$etween the lenders and $orrowers o" "unds and also as the holders o" cash and old securities( ,n this connection+ it would $e interesting to re"er to dam !mith who in his "a%ous $ook+ "&ealth of )ationsf*, pu$lished in 1666+ has descri$ed the %ain "unction o" the Bank o" 4%sterda% as under& M#his $ank recei!ed $oth "oreign coin+ and light and worn coin o" the country at its intrinsic !alue in the gold standard %oney o" the country+ deducting only so %uch as necessary "or de"raying the e9pense o" coinage+ and the other necessary e9pense o" %anage%ent( /or the !alue which re%ained+ a"ter this deduction was %ade+ it ga!e a credit in its $ooks( #his credit was called $ank %oney which+ as it represented %oney e9actly according to the standard o" the %int+ was always o" the sa%e real !alue+ and intrinsically worth %ore than current %oney((((+ it could $e paid away $y a si%ple trans"er+ without the trou$le o" counting or the risk o" transporting it "ro% one place to another( <e ha!e already seen that the Bank o" )ngland was started in 1657 as a result o" the actions o" Charles $$ who had $orrowed !ery hea!ily "ro% the golds%iths and like his "ather had repudiated his de$ts( #he Bank o" )ngland was also started on account o" the "inancial di""iculties o" &illiam $$$ who was at war with /rance( Patterson suggested a way out o" di""iculties and o""ered to rise o" P1+@00+000 which he was prepared to loan to the go!ern%ent i" certain concessions including the right to issue notes were gi!en to the proposed institution( /or this purpose the #onnage 4ct was passed( ,n the year 160C another i%portant 4ct was passed which prohi$ited any other $ank with %ore than si9 partners "ro% issuing pro%issory notes and $ank-notes( #his 4ct ga!e the %onopoly o" note issue to the Bank o" )ngland+ so "ar as the Aoint :tock Banks were concerned+ $ut le"t pri!ate $anks ha!ing not %ore than si9 partners "ree to issue notes( #hese $anks howe!er+ thought that the $usiness o" note issue was not pro"ita$le and they ga!e it up( Printed che*ues were issued "or the "irst ti%e $etween 1675-B5( #he Bank o" )ngland did not ha!e any $ranch outside and the pri!ate $anks started playing an i%portant role( 4"ter the %iddle o" the 1Cth century there were a$out ?00 $anks( #hen ca%e the crisis o" 1C@B and it tolled the death knell "or the s%all country $anks and o" the note as the "oundation o" the $anking syste%( ,n 1C@6 an 4ct was passed which allowed the $anks to $e started with unli%ited lia$ility+ consisting o" %ore than si9 partners+ with the right to issue note pro!ided they had no o""ice within the radius o" si9ty-"i!e %iles "ro% London( #hus the new Doint stock $anks were started( )!en at this ti%e the %onopoly o" note issue gi!en to the Bank o" )ngland $y the 4ct o" 160C+ was interpreted to %ean %onopoly o" Aoint :tock Banking in London $ecause during those days note issue was regarded as the %ost i%portant as well as the %ost paying "unction o" $anks( #he %ode% $anking institution had to wait "or another century and "our decades until the passage o" the Banking 4ct o" 1C?? which pro!ided "or the esta$lish%ent o" the Aoint :tock Banks( ,n 1C??+ when the Charter o" the Bank was re!ised+ as a result o" the studies %ade $y one +o,lin, a new clause was added and it ga!e legislati!e sanction "or the esta$lish%ent o" Aoint :tocks Banks in London Copyright Virtual ni!ersity o" Pakistan 23
Banking Laws and Practices-BNK 601 VU and in 1C?7+ #he London and <est%inster Bank was started in )ngland+ which is the "irst o" the $ig "i!e ones( ,n 1C77 Peel 4ct was passed which pro!ided "or the e9tinction o" the right o" note issue and laid the "oundation o" the note $y Bank o" )ngland( <ith the passing o" the PeelHs 4ct+ 1C77+ new $anks with the right o" note issue could not $e started and those which already e9isted could not increase their circulation and thus greater e%phasis was there$y laid on deposit $anking and che*ue currency( #here was a%alga%ation o" $anks a"ter 1C50 and the nu%$er o" Aoint :tock Banks in )ngland and <ales ca%e down "ro% 107 in 1C50 to 1@ in 15B6 although the nu%$er o" $ank o""ices increased "ro% @@0? to 10600 $y the end o" 1561( #he Currency and Bank Note 4ct+ 15@0 also regulated the issue o" $ank-note( #he :ecurities -anage%ent #rust Ltd( was organi2ed in 15@5( ,n 15?0 Bankers ,ndustrial 'e!elop%ent Corporation was "or%ed( ,n 1576+ the La$or >o!ern%ent nationali2ed the Bank o" )ngland and the power to appoint its >o!ernor+ 'eputy >o!ernors and 'irectors was !ested in the Crown( #his 4ct o" the La$or >o!ern%ent had signi"icant i%pact throughout the world( F4n 4ct to regulate the acceptance o" deposits in the course o" H( $usinessJ to con"er "unctions on the Bank o" )ngland with respect to the control o" institutions carrying on deposit-taking $usinessesJ to gi!e "urther protection to persons who are depositors with such institution to %ake pro!ision with respect to ad!ertise%ents in!iting the %aking o" depositsJ to-restrict the use o" na%es and descriptions associate with $anks and $ankingJ to prohi$it "raudulent induce%ent to %ake depositJ to a%end the Consu%er Credit 4ct+ 1567 and %e law wit respect to instru%ents to which section 7 o" the Che*ues 4ct+ appliesJ to repeal certain enact%ents relating to $anks and $ankingJ and "or purposes connected therewith(G #he signi"icance in law o" the ter%s H$ank E+ $ankerH and H$anking $usinessM depends upon the particular operation which is in *uestion an upon the particular statute.i" any+ under which the *uestion arises( #o take an o$!ious instance+ only a $anker %ay reap the $ene"it o" the protecti!e sections contained in di""erent statutes( ,n short the e""ect o" the Banking 4ct+ 1565 is+ generally speaking+ that a person or institution %ay accept deposits in the course o" carrying on deposit taking $usiness "or the purposes o" the 4ct unless he or it is a party recogni2ed or licensed $y the Bank o" )ngland or he or it is e9e%pted or its $usiness "alls within the e9ceptions o" section 13?8 or+ again+ the deposit is , the type included in su$-section 3B8( -ide section 1378+ HdepositH is de"ined as su% o" %oney paid on ter%s& 3a8 nder which it will $e repaid+ with or without interest or pre%iu%+ and either on de%and or at a ti%e or in circu%stances agreed $y or on $ehal" o" the person %aking the pay%ent and the person recei!ing itJ and 3$8 <hich are not re"era$le to the pro!ision o" property or ser!ice or the gi!ing o" securityR #he penalty "or contra!ention is lia$ility to a "ine or i%prison%ent $othJ $ut the ci!il lia$ility o" the acceptor o" the deposit is not a""ected( #hus so "ar as the )nglish $anking syste% is concerned+ the entire %atter is now co!ered $y the Banking 4ct+ 1565 which go!erns all the i%portant aspects o" the $anking li"e in )ngland 4s per :heldonHs "Practice and .a# of Banking", 10th )dn(+ p( 16?+ so "ar as the classi"ication o" $anks is concerned+ "irstly+ there is the Bank o" )ngland+ incorporated $y ;oyal Charter and not a""ected $y the Co%panies 4ct( :econdly+ there are the National :a!ing Banks+ the National >iro and the #rustee :a!ing Banks( #hirdly+ there are the great Aoint :tock Banks+ registered under the Co%panies 4ct with li%ited lia$ility( /ourthly+ there is at least one Aoint :tock Bank with unli%ited lia$ility+ na%ely+ C( 1oare 0 Co(+ Coutts 0 Co( which is now a wholly owned su$sidiary o" National <est%inster Bank Ltd( though it is still a clearing $ank in its own right( #here used to $e %any $anking partnerships with unli%ited lia$ility $ut+ with N(-( ;othschild 0 :ons $eco%ing a li%ited co%pany in 1560+ it see%s that there re%ains no $anking partnership in )ngland and <ales o" any si2e( + /i"thly+ there are the :cottish+ (,rish+ =!erseas and /oreign Banks whose principal places o" $usiness are outside the precincts 24 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU o" )ngland and <ales( :o%e o" the earlier o!erseas $anks were incorporated $y ;oyal Charter+ e.g., the Chartered Bank+ British Bank o" the -iddle )ast+ and so on( :i9thly+ there are so called -erchant Banks+ which are now without e9ception incorporated under the Co%panies 4ct+ the shares o" %any o" the% $eing *uoted on the London :tock )9change( #hese $anks are engaged in deposit $anking $ut their %ore i%portant role is in the pro!ision o" "inance+ $oth $y way o" loan and acceptance credit and in acting as "inancial ad!isers to a large range o" co%%ercial co%panies.especially where Htake-o!er $idsH+ %ergers and a%alga%ations are concerned( -ost o" the% are also prepared to act as in!est%ent ad!isers( ,n conclusion+ we can say that $anking is not a static rather it is a dyna%ic concept( ,t is product o" centuries and the de!elop%ent which has taken place is the product o" the %ethod o" trial and error and e9periences which were %ade and the results that "ollowed relating to the acceptance o" %oney and !alua$les as deposits+ keeping the% as such+ lending the%+ whether to pri!ate indi!iduals or to states or other $odies and "or controlling the %ulti"arious and %ulti-di%ensional acti!ities which in the $eginning were only tri!ial and could $e ignored $ut with the growth o" ti%e+ $eca%e international in character and %ulti-di%ensional in nature calling "or actions on the part o" the states as the actions on the part o" the indi!iduals "ailed and state control $eca%e e%inent( #hus+ one cannot understand the de!elop%ent o" $anking %erely $y looking at a particular period o" ti%e and one will ha!e to consider the de!elop%ent $y taking into account the progress as it has taken place during the centuries and $y understanding the %o!e%ent "ro% one stage to the other( Evolution o% ban$ing in /a$istan: Co%%ercial $anks constitute the %ost i%portant source o" institutional credit in the econo%y( 4s the countryEs largest deposit institutions and the %ain source o" short-ter% credit+ they "or% the heart o" the "inancial syste%( 4t the ti%e o" independence+ there were two $anks incorporated in the undi!ided ,ndia in "irst hal" o" 1570sE whose owners were -usli%s( 4"ter independence they decided to esta$lish their head o""ice in Pakistan+ thus laying the "oundation o" $anking in this country( #he National Bank o" Pakistan was set up in No!e%$er 1575 in crises conditions "ollowing the "irst trade deadlock with ,ndia( #he original intention was to esta$lish it so%eti%e in 15B0( #he plans "or its esta$lish%ent had to $e ad!anced in !iew o" the critical situation+ which de!eloped especially in the Dute trade as a result o" ,ndiaEs re"usal to accept the e9change rate o" the Pakistani ;upee "ollowing the ,ndian de!aluation o" 1575( #he $ank was set up through an =rdinance on 15 No!e%$er 1575 and started its operations with "i!e o""ices located at i%portant Dute centres( ,t played a nota$le role in "inancing the Dute trade in colla$oration with the Aute Board( ,n 15B@+ the National Bank o" Pakistan took o!er the agency work o" the :tate Bank o" Pakistan to transact go!ern%ent $usiness and %anage currency chests at places where the state $ank did not ha!e an o""ice o" its own( Prior to nationali2ation+ the go!ern%ent owned @B percent o" the share capital while others held the re%aining 6B percent( /ollowing nationali2ation+ the capital held $y others was trans"erred to and in!ested in the "ederal go!ern%ent( Prior to nationali2ation+ a Central Board o" 'irectors go!erned the National Bank $ut conse*uent upon nationali2ation+ the Central Board was dissol!ed and in its place an )9ecuti!e Board consisting o" a President who is the chie" e9ecuti!e and "our other %e%$ers were appointed "or the general direction and superintendence o" the a""airs and $usiness o" the $ank( 4ll Pakistan $anks were nationali2ed with 100 percent "ederal go!ern%ent ownership in 1567 and $y now all nationali2ed $anks stand disin!ested and pri!ati2ed( #hese aspects shall $e discussed in detail in due course o" ti%eE #here were as %any as thirty-"our "oreign $anks with 16@ $ranches at the ti%e o" in dependence( <ith the closure o" %any o" the $anks+ the nu%$er had declined to twenty-one $y Aune 15C0( #he ,ndian Banks+ which nu%$ered nine were entrusted to the Custodian o" )ne%y Property a"ter the 156B ,ndoPak war( 4%ong "oreign $anks+ a distinction was usually %ade $etween $anks ha!ing their head o""ices in ,ndia and those with head o""ices in other countries( /oreign $anks+ other than the ,ndian $anks+ were Copyright Virtual ni!ersity o" Pakistan 25
Banking Laws and Practices-BNK 601 VU co%%only known as e9change $anks in the early years( #he ter% owed its origin to the "act that+ prior to independenceJ "oreign $anks in the ,ndo-Pakistan su$continent were engaged pri%arily in the "inancing o" "oreign trade( :e!en e9change $anks incorporated a$road were operation in Pakistan at the ti%e o" independence( -ost o" thse $anks were o" British origin( #here were twenty-nine ,ndian Banks operating in the territories o" Paksitan at the ti%e o" ,ndependence $ut they gradually curtailed their $usiness and their nu%$er stood at nine in 156B when they were taken o!er $y the Custodian o" )ne%y Property( #he $anks that were taken o!er were& 318 :tate $ank o" ,ndiaJ 3@8 Central Bank o" ,ndia Ltd(J 3?8 Bank o" ,ndia Ltd(J 378 nited Co%%ercial Bank Ltd(J 3B8 PunDa$ Co%%erce Ltd(J 368 nited Bank o" ,ndia Ltd(J 3C8 Bank o" Baroda Ltd(J and 358 nited industrial $ank Ltd( Besides+ there were as %any as twel!e non-schedule ,ndian $anks which were also taken o!er $y the Custodian o" )ne%y property "ollowing the 156B ,ndo-Pakistan <ar( Very "ew "oreign $anks ha!e $een attracted to Pakistan during the "inancial li$erali2ation period( ,ndeed se!eral ha!e sold out to pri!ate Pakistani $anks and ter%inated operations in Pakistan( Evolution o% Commercial &an$s in /a$istan 4s already discussed that at the ti%e o" independence+ there were only two $anks+ which were incorporated in undi!ided ,ndia and whose owners were -usli%s +they opted to shi"t their 1ead =""ices in Pakistan( <ith the esta$lish%ent o" :BP+ the other $anks also ca%e into e9istence and $y 156? nu%$er o" $anks increased to "ourteen( NationaliHation o% &an$s in /a$istan: ,n 1567+ the $anks in Pakistan were nationali2ed through an 4ct called Nationali2ation 4ct+ 1567( /ro% 1551+ the policy o" li$erali2ation o" econo%y has $een adopted where$y+ nationali2ed $anks ha!e $een de-nationali2ed and $anking sector has $een disin!ested( 4t present $anking sector is !isi$ly growing at tre%endous pace( #hese aspects shall $e discussed at length in due course(
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Banking Laws and Practices-BNK 601 TAE &AN>S ;NAT?ONA4?IAT?ON< ACT, -51
VU LESSON 6
NationaliHation o% &an$s <e ha!e gone through the e!olutionary process o" $anking in Pakistan( <e know that $y Aune ?0 th 157C the nu%$er o" $ranches in Pakistan was only eighty one( 1owe!er with the esta$lish%ent o" :tate Bank o" Pakistan and e""orts o" the go!ern%ent+ the nu%$er o" schedule $ank increased to 17 with ??@? $ranches all o!er Pakistan and also 67 $ranches in "oreign countries $y 'ec ?1 st 156?( #he co%%ercial $anks grew at tre%endous speed and %o$ili2ed sa!ings "ro% the pu$lic and also contri$uted a lot in "inancing $usiness and corporate sector( 1owe!er it was considered that although $anking sector was growing $ut the "ruits o" de!elop%ent were li%ited only to the ur$an population and corporate sector whereas %ost o" the sectors+ people and under de!elop regions were not getting due share( 4s such it was decided that $anks should $e nationali2ed( /or the i%ple%entation o" this o$Decti!e Nationali2ation 4ct 1567 was pro%ulgated( Objectives o% NationaliHation #he nationali2ation was carried out with a !iew to achie!e the "ollowing o$Decti!es& -- 'is$urse%ent o" "unds to the desired channels to achie!e the priorities set out $y the go!ern%ent "or social wel"are proDects( -- )*uita$le distri$ution o" credit to di""erent classes+ sectors and regions( Salient %eatures o% T)e &an$ ;NationaliHation< Act, -51 #he 4ct e9tends to the whole o" Pakistan( Act to override ot)er la'sC+ #his 4ct shall ha!e e""ect not withstanding anything contained in any other law "or the ti%e $eing in "orce or in any agree%ent+ contract+ award %e%orandu% or articles o" association or other instru%ent( Statutor# 7e%initions T)e %ollo'ings de%initions as contained in section * o% t)e Act, ')ic) are re(roduced belo' C J&an$J means aC 4 co%pany registered under the Co%panies 4ct+ 151? 3V,, o" 151?8+ and transacting+ in or outside Pakistan+ the $usiness o" $anking as de"ined in clause 3$8 o" section B o" the Banking bC Co%panies =rdinance+ 156@ 3LV,, o" 156@8+ in respect o" which no proceedings under Part ,,, or Part ,V o" the said =rdinance ha!e $een taken or are pending i%%ediately $e"ore the co%%encing dayJ and cC 4 $anking co%pany incorporated $y or under any law within the legislati!e co%petence o" dC Parlia%ent+ including the :tate Bank+ the National Bank o" Pakistan+ the ,ndustrial ?C 'e!elop%ent Bank o" Pakistan and the 4gricultural 'e!elop%ent Bank o" Pakistan+ $ut does not includeJ??C 4 $ank which is an ene%y "ir% within the %eaning o" the 'e"ense o" Pakistan ;ules+ or ???C 4 $anking co%pany incorporated outside Pakistan and transacting $anking $usiness in Pakistan+ or ?VC 4 co-cooperati!e $ank registered under the Co-operati!e :ocieties 4ct+ 15@B 3V,, o" VC 15@B8+ or any other law "or the ti%e $eing in "orce relating to co-operati!e societies+ not $eing a cooperati!e $ank which is a scheduled $ankJ or V?C 4 >o!ern%ent :a!ings Bank to which the >o!ern%ent :a!ings Bank 4ct+ 1C6? 3V o" 1C6?8+ applies+ or V??C 4 corporation or co%pany owned or controlled $y a Pro!ince and carrying on $anking $usiness only within that Pro!ince+ or
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Banking Laws and Practices-BNK 601 VU V???C !a corporation or co%pany esta$lished in Pakistan in pursuance o" an agree%ent $etween the >o!ern%ent o" Pakistan and /oreign >o!ern%ent or institution "or transacting $anking $usiness in or outside PakistanJ ?KC ; A< LboardJ %eans Board o" 'irectors constituted under this 4ctJ !C JCommencing da#M %eans the ,st day o" Aanuary+ 1567J ;1A< L4oans and advancesM %eans Mloans+ ad!ances and creditM as de"ined in the Banking Co%panies =rdinance+ 156@ 3LV,, o" 156@8+ *C J/rescribedJ %eans prescri$ed $y rules %ade under this 4ctJ 1C JState &an$J %eans the :tate Bank o" Pakistan esta$lished under the :tate Bank o" Pakistan 4ct+ 15B6 3SSS,,, o" 15B68J and =ther words and e9pressions used $ut not de"ined in this 4ct shall ha!e the sa%e %eaning as in the Banking Co%panies =rdinance+ 156@ 3LV,, o" 156@8( /rovisions regarding trans%er o% o'ners)i( o% ban$s are contained in section 0 o% t)e Act ')ic) is re(roduced belo' C #he ownership+ %anage%ent and control o" all $anks shall stand trans"erred to+ and !est in+ the /ederal >o!ern%ent on the co%%encing day( !C 4ll shares in the capital o" a $ank held $y persons other than the /ederal >o!ern%ent+ a Pro!incial >o!ern%ent+ a corporation owned or controlled $y the /ederal >o!ern%ent or the :tate Bank shall stand trans"erred to+ and !est in+ the /ederal >o!ern%ent on the co%%encing day+ "ree o" all trusts+ lia$ilities and encu%$rances( ;!A< i" any $ank issues any additional share capital a"ter the co%%encing day+ then+ without preDudice to the pro!isions o" su$-section 318+ a Pro!incial >o!ern%ent+ a corporation owned or controlled $y the /ederal >o!ern%ent and the :tate Bank %ay contri$ute to the share capital so issued( *C #he !esting o" any shares in the /ederal >o!ern%ent under su$-section 3@8 shall not a""ect the right inter se o" a shareholder and any other person who %ay ha!e an interest in such shares and such other person shall $e entitled to en"orce his interest against the co%pensation awarded to the shareholder under section 6( 1C #he sa"ety o" all deposits in $anks shall stand guaranteed $y the /ederal >o!ern%ent( 0C #he pro!isions o" this 4ct and the !esting o" the shares o" the $anks in the /ederal >o!ern%ent thereunder shall not in any way a""ect the status o" the $anks as $odies corporate .C #he /ederal >o!ern%ent or a corporation owned or controlled $y the /ederal >o!ern%ent %ay+ "ro% ti%e to ti%e+ sell all or any o" its shares in the capital o" a $ank+ other than the :tate Bank+ to such persons+ and on such ter%s and conditions+ as it %ay deter%ine( /rocedure regarding com(ensation %or trans%er o% o'ners)i( o% s)ares in a ban$ is contained in section . ')ic) is re(roduced belo': ; < )!ery person who stands registered as the holder o" any share o" a $ank the ownership+ %anage%ent and control o" which stands trans"erred to the /ederal >o!ern%ent $y !irtue o" section B shall $e entitled to recei!e "ro% the /ederal >o!ern%ent $y way o" co%pensation per share an a%ount deter%ined in accordance with the pro!isions o" section 6 in the "or% o" $onds o" the /ederal >o!ern%ent+ repaya$le at par at any ti%e within a period o" "i"teen years in accordance with a rede%ption progra%%ed "or%ulated $y the /ederal >o!ern%ent and $earing interest at the rate o" one per cent a$o!e the $ank rate noti"ied $y the :tate Bank "ro% ti%e to ti%e& Pro!ided that+ in "or%ulating the rede%ption progra%%ed+ the /ederal >o!ern%ent %ay %ake pro!ision "or pre"erential rede%ption o" the $onds o" such class o" persons who are o" %eager %eans such as orphans+ widows and pensioners+ and the a%ount o" co%pensation paya$le to who% does not e9ceed such %a9i%u% a%ount+ as the /ederal >o!ern%ent %ay dee% "it& Pro!ided "urther that+ where the a%ount so deter%ined is not e9act %ultiple o" one hundred rupees+ the a%ount in e9cess o" the nearest lower %ultiple o" one hundred rupees shall $e paid in cash( 28 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 ;!< #he $onds shall $e negotia$le and eligi$le as security "or ad!ances(
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T)e (revious management 'as removed as (er (rovisions contained in section 6 o% t)e Act ')ic) is re(roduced belo': < )!ery person holding o""ice in any $ank as chair%an+ director or chie" e9ecuti!e $y what-e!er na%e called+ other than a person who holds such o""ice $y !irtue o" his appoint%ent or no%ination $y the /ederal >o!ern%ent or the :tate Bank+ shall stand re%o!ed "ro% his o""ice on the co%%encing day and this re%o!al shall not entitle hi% to any co%pensation and no such clai% shall $e entertained $y any court+ tri$unal or other authority( !< #he !acation o" his o""ice $y a Chair%an+ 'irector or Chie" )9ecuti!e under su$section 318 or otherwise shall not in any way a$sol!e hi% o" his lia$ility+ i" any+ under any law+ contract or otherwise howsoe!er su$sisting i%%ediately $e"ore the co%%encing day or the day on which he ceases to hold such o""ice( *< 4 Chair%an+ 'irector or Chie" )9ecuti!e $y whate!er na%e called ceasing to hold o""ice under any o" the a"oresaid pro!isions shall entrust or cause to $e entrusted to the person succeeding hi% in that o""ice+ intact and in as good order as they e9isted on the day i%%ediately preceding the co%%encing day all properties+ all $ooks o" accounts and other records and docu%ents $elonging to or in the custody or control or pertaining to the a""airs+ o" the $ank( 1< Central Board o" the $anks %entioned in the :chedule+ and all local $odies+ area $oards+ %anaging co%%ittees+ e9ecuti!e co%%ittees and si%ilar other $odies "or the %anage%ent o" any $ank shall stand dissol!ed+ and all %e%$ers o" such $odies shall stand re%o!ed "ro% o""ice+ on the co%%encing day( /a$istan &an$ing Council < 4t the ti%e o" pro%ulgation o" this 4ct+ Pakistan $anking council was esta$lished to o!ersee the working and per"or%ance o" nationali2ed $anks( 1owe!er+ the council was dissol!ed !ide Banks 3Nationali2ation8 34%end%ent8 ordinance 1556+ the %ain "eatures as contained in section 5 o" the 4ct are gi!en $elow& !< #he Pakistan Banking Council 3hereina"ter re"erred to as the Council8 shall stand dissol!ed "orthwith( *< 4ll assets+ properties and rights o" the Council shall stand trans"erred to and !est in+ and all lia$ilities and other encu%$rances o" the Council shall stand trans"erred to and $eco%e the lia$ilities and encu%$rances o"+ the :tate Bank( a< )%ployees o" the Council+ including its %e%$ers+b< who are on deputation or second%ent "ro% any pu$lic sector "inancial institution shall re!ert to+ and continue to $e e%ployed $y+ their parent institutions on ter%s and conditions go!erning their e%ploy%ent in their parent institutionsJ and c< <ho do not "all in clause 3a8 shall $eco%e e%ployees o" the :tate Bank on ter%s and conditions go!erning their e%ploy%ent with the Council( d< )!ery contract or instru%ent to which the Council is a party shall continue to $e in "orce and e""ecti!e as i" the :tate Bank had $een a party thereto instead o" the Council( e< 4ny legal proceedings or+ as the case %ay $e+ any application pending $e"ore any authority $y or against the Council %ay $e continued $y or against the :tate Bank( %< <here under any statute or statutory instru%ent+ the Chair%an or a %e%$er o" the Council is no%inated "or a speci"ied assign%ent o" task+ the !acancy caused $y operation o" this section shall $e "illed $y a person no%inated $y the :tate Bank( /rovisions regarding management o% ban$s are contained in section belo': < :u$Dect to su$ section 3@8 a $ank shall ha!e a Board consisting o"a< 4 President+ who shall $e its Chie" )9ecuti!eJ and b< Not less than "i!e and not %ore than se!en other %e%$ers( Copyright Virtual ni!ersity o" Pakistan 29 ')ic) is re(roduced
Banking Laws and Practices-BNK 601 VU !< #he /ederal >o!ern%ent %ay+ i" it dee%s necessary+ appoint a Chair%an o" the Board in respect o" a $ank( *< #he Chair%an+ the President and other %e%$ers o" the Boarda< shall $e appointed $y the /ederal >o!ern%ent in consultation with the :tate Bank+ "or a ter% o" three years+ on such ter%s and conditions as %ay $e "i9ed $y the >eneral -eeting o" the $ank& b< pro!ided that the Chair%an and the President shall $e appointed "ro% a%ongst pro"essional $ankers whose na%es are included in a panel o" $ankers *uali"ied to $e the Chair%an or the President+ c< which panel shall $e deter%ined+ %aintained and !aried+ "ro% ti%e to ti%e+ $y the :tate BankJ d< %ay $e re%o!ed "or %isconduct or physical and %ental incapacity $e"ore the e9piry o" the three years ter% $y the /ederal >o!ern%ent in consultation with the :tate BankJ e< shall stand re%o!ed i" he $eco%es ineligi$le on any o" the grounds speci"ied in su$-section31@8J %< -ay $e re-appointed $y the /ederal >o!ern%ent+ in consultation with the :tate Bank o" Pakistan+ "or a "urther period o" three years( 1< #he general direction and superintendence o" the a""airs and $usiness o" a $ank+ and o!erall policy %aking in respect o" its operations+ shall !est in its Board( 0< #he Board shall deter%ine?C the credit policies o" the $anksJ ??C ???C ?VC VC e!aluation criteria "or the per"or%ance o" the e%ployees o" the $ank other than the PresidentJ personnel policies o" the $ank including appoint%ent and re%o!al o" o""icers and e%ployeesJ guidelines "or entering into any co%pro%ise with $orrowers and other custo%ers o" the $ankJ and 4ny other policy %atter(
6< #he Chie" )9ecuti!e and other o""icers o" the $ank shall act in accordance with the policies+ criteria and guidelines deter%ined $y the Board( -< #he $oard shall appoint co%%ittees "ro% a%ongst the e9ecuti!es o" the $ank+ and deter%ine the powers+ "unctions and duties o" such co%%ittees( 8< <here the /ederal >o!ern%ent has appointed a Chair%an he shall preside o!er the %eetings o" the Board+ and in case a Chair%an has not $een appointed+ then the president shall preside o!er the %eetings o" Board( ,n the a$sence o" the Chair%an or the President+ as the case %ay $e the directors %ay elect one o" its %e%$ers to preside o!er the %eetings( < #he President+ su$Dect to the control and directions o" the Board+ shall e9ercise powers o" %anage%ent o" the a""airs o" the $ank( !< 4ll selections+ pro%otions and trans"ers o" e%ployees o" $anks e9cept the President and decisions as to their re%uneration and $ene"its shall $e %ade $y the President in accordance with e!aluation criteria and personnel policies deter%ined $y the Board( *< #he Board+ the President and other o""icers shall e9ercise their powers and discharge their duties in accordance with sound $anking principles and prudent $anking practices and shall ensure co%pliance with regulations and directions that %ay $e issued $y the :tate Bank "ro% ti%e to ti%e( 1< No person shall $e eligi$le "or appoint%ent as the Chair%an+ the President+ or a %e%$er o" the Board i"aC he is or has at any ti%e $een+ adDudged an insol!ent or has suspended pay%ent or has co%pounded with his creditorsJ or bC he is a %inor or is "ound a lunatic or o" unsound %indJ or cC he is not citi2en o" PakistanJ or dC he was at any ti%e in the ser!ice o" /ederal >o!ern%ent or a corporation controlled $y any such >o!ern%ent or in the ser!ice o" a $ank and was dis%issedJ or eC he is a person against who% any action has $een taken or any proceedings are pending under section 71@ o" the Co%panies =rdinance+ 15C7+ 3SLV,, o" 15C78+ or section C? o" the Banking Co%panies =rdinance+ 156@ 3LV,, o" 156@8J or %C he is+ or has $een con!icted "or ta9 e!asion under any law "or the ti%e $eing in "orceJ or 30 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU gC he is a %e%$er o" the :enate+ National 4sse%$ly+ any Pro!incial 4sse%$ly or an elected -e%$er o" a local council constituted under any law relating to local councilsJ or )C 1e is holding an o""ice in a political party(
E%%ects o% NationaliHation /ros: Cons: 4!aila$ility o" "unds to the go!ern%ent "or %eeting its social sector targets )*uita$le distri$ution o" credit to the di""erent sectors+ industries and regions( Centrally coordinated policy "ra%e work )9cessi!e go!ern%ent control leading to the decisions on non pro"essional considerations( Lack o" "air %arket co%petition leading to a$sence o" a!aila$ility o" inno!ati!e and di!ersi"ied products to the custo%ers( Neglect o" personali2ed ser!ices to the custo%ers( -is%anage%ent leading to alar%ing si2e o" nonper"or%ing loans port"olio(
Nationali2ation 4ct is an i%portant part o" our statutory history( <e ha!e+ at length discussed o$Decti!es %erits and grey areas o" nationali2ation( 4t present the world is heading "orward with the notions o" disin!est%ent+ pri!ati2ation and "ree %arket and $anking industry is no e9ception to it( 4t present $anking industry is passing through this phase and !isi$ly per"or%ing well(
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VU LESSON 7
&AN>?NG COM/AN?ES OR7?NANCE, -.! ?ntroduction Law relating to Banking Co%panies is go!erned $y Banking Co%panies =rdinance+ 156@( 4s we ha!e seen that there are other laws which are related to the $anking transactions and are o" interest to di""erent stake holders as such we shall take into account these ancillary statutes. laws $esides this ordinance( A((lication o% ot)er la's s)all not be barred under section! #his ordinance shall ha!e limited a((lication to certain %inancial institutions C #he pro!isions o" sections 6+@B4+ @B44+ @5+?1+?@+??+70+ 71+714+ 71B+ 71C+ 71'+ 7@+ C?+ C7+ and 57 o" this =rdinance shall+ with such %odi"ications as the :tate Bank %ay deter%ined "ro% ti%e to ti%e in relation to acti!ities which ha!e i%plications "or the %onetary or credit policies o" the :tate Bank+ apply to the ,n!est%ent Corporation o" Pakistan+ the National ,n!est%ent nit #rust+ the Pakistan ,ndustrial Credit and ,n!est%ent Corporation+ the 1ouse Building /inance Corporation+ the National 'e!elop%ent /inance Corporation+ the Bankers )*uity Li%ited+ the Pak-Li$ya 1olding Co%pany Li%ited+ the Pakistan Kuwait ,n!est%ent Co%pany Li%ited+ the :audi-Pak ,ndustrial and 4gricultural ,n!est%ent Co%pany Li%ited+ the :%all Business /inance Corporation+ the ;egional 'e!elop%ent /inance Corporation+ ,n!est%ent /inance Co%panies+ Venture Capital Co%panies+ 1ousing /inance Co%panies Corporations or ,nstitutions which carry on one or %ore o" the $usinesses enu%erated in section 6 o" this =rdinance+ sa!e and e9cept "or leasing co%panies and %odara$a co%panies+ as the /ederal >o!ern%ent %ay "ro% ti%e to ti%e+ $y noti"ication in the =""icial >a2ette+ speci"y in this $ehal"( !C 4ll noti"ications issued $y the /ederal >o!ern%ent which are inconsistent with the pro!isions o" su$-section 318 including such noti"ications in respect o" the National 'e!elop%ent Leasing Corporations+ Leasing Co%panies and -odara$a Co%panies shall stand rescinded with i%%ediate e""ect( #he /ederal >o!ern%ent shall ha!e powers to suspend the operations o" =rdinance under section 7( #he /ederal >o!ern%ent+ i" on a representation %ade $y the :tate Bank in this $ehal" is satis"ied that it is e9pedient so to do+ %ay $y noti"ication in the =""icial >a2ette suspend "or such period+ not e9ceeding si9ty days+ as %ay $e speci"ied in the noti"ication+ the operation o" all or any o" the pro!isions o" this =rdinance+ either generally or in relation to any speci"ied $anking co%pany( #he /ederal >o!ern%ent %ay+ $y noti"ication in the o""icial >a2ette+ e9tend "ro% ti%e to ti%e+ the period o" any suspension under su$-section 318 "or such period or periods+ not e9ceeding si9ty days at any one ti%e+ as it thinks "it so howe!er that the total period does not e9ceed one year( 4 copy o" any noti"ication issued under this section shall $e laid on the ta$le o" the /ederal Legislature N - i" it is in session+ 'it)in t)ree da#s o" the issue o" the noti"icationJ and - ," it is not in session+ as soon as it %eets a"ter the issue o" the noti"ication( #he $anking co%panies =rdinance 156@ has $een di!ided in "i!e parts+ co%prising o" 57 sections( <e shall also co!er the $anking co%panies rules+ 156?( <e shall discuss this ordinance in greater detail $ut to ha!e a gli%pse o" the scope o" the ordinance+ the %ain topics to $e co!ered are gi!en $elow "or ready re"erence( /ART M /reliminar# /ollowing topics are co!ered under this Part 32 #itle+ e9tent and co%%ence%ent 4pplication o" other laws not $arred Li%ited application o" =rdinance to certain "inancial institutions Power to suspend operation o" =rdinance Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 - 'e"initions& F4ppro!ed securitiesG F$ankingG F$anking co%panyG F$ranchG or F$ranch o""iceG FcreditorG Fco%panyG Fde$torG Fde%and lia$ilitiesG F"a%ily %e%$ersG FgoldG Floans+ ad!ances and creditG F%anaging directorG Fprescri$edG Fpri!ate co%panyG FregistrarG Fscheduled $ankG Fsecured loans or ad!anceG FsecuritiesG F:tate BankG Fsu$stantial interestG - =rdinance to o!erride %e%orandu%+ articles+ etc /ART ?? &usiness o% &an$ing Com(anies /ollowing topics are co!ered under this Part
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/or%s o" $usiness in which $anking co%panies %ay engage( se o" the word GBankG or any o" its deri!ati!es( Prohi$ition o" trading( 'isposal o" non-$anking assets( Prohi$ition o" e%ploy%ent o" %anaging agents and restrictions on certain "or%s o" e%ploy%ent( ;estrictions on re%o!al o" records and docu%ents( ;e*uire%ent as to %ini%u% paid-up capital and reser!e( ;egulation o" paid-up capital su$scri$ed capital and authori2ed capital and !oting rights o" shareholders( )lection o" new directors( 4ppoint%ent o" director $y :tate Bank( ;estriction on ter% o" o""ice o" directors( Vacation o" =""ice( ;estriction on co%%ission+ $rokerage discount+ etc(+ on sale o" shares( Prohi$ition o" charge on un-paid capital( Prohi$ition o" "loating charge on assets( ;estrictions as to pay%ent o" di!idend( Prohi$ition o" co%%on directors( ;eser!e /und( Cash ;eser!e( ;estriction on the nature o" su$sidiary co%panies( ;estrictions on loans and ad!ances( Power o" :tate Bank to control ad!ances $y $anking co%panies( Power o" :tate Bank to collect and "urnish credit in"or%ation( Copyright Virtual ni!ersity o" Pakistan 33
Banking Laws and Practices-BNK 601 VU Preparation o" special reports( ;eco!ery o" certain dues o" $anking co%panies as arrears o" land re!enue( Power o" /ederal >o!ern%ent prohi$it acceptance o" deposits $y $anking co%panies incorporated outside Pakistan( 'eposits( Licensing o" $anking co%panies( Prohi$ition o" ad!ertising "or deposits and collection( 'isrupti!e union acti!ities( ;estrictions on opening o" new+ and trans"er o" e9isting place o" $usiness( -aintenance o" li*uid assets( 4ssets in Pakistan( nclai%ed deposits and articles o" !alue( 1al"-yearly returns and power to call "or other returns and in"or%ation( Power to pu$lish in"or%ation( /idelity and secrecy( >uidelines $y the :tate Bank( 4ccounts and $alance-sheet( 4udit( :u$%ission o" returns( Copies o" Balance :heets+ and 4ccounts to $e sent to ;egistrar( 'isplay o" audited $alance sheet $y $anking co%panies ,ncorporated outside Pakistan( 4ccounting pro!isions o" this =rdinance not retrospecti!e( ,nspection( ;esponsi$ility o" :tate Bank( Power o" the :tate Bank to gi!e directions( Power o" the :tate Bank to re%o!e directors or other %anagerial persons "ro% o""ice( Power o" the :tate Bank to supersede Board o" 'irectors o" a $anking co%pany( Li%itations( Prosecution o" directors+ Chie" )9ecuti!es or other =""icers( /urther powers and "unctions o" the :tate Bank( Certain pro!isions o" the =rdinance not to apply to certain $anking co%panies( /art M??A Transaction o% &an$ing &usiness ?llegall# &# Com(anies, etcC /ollowing topics are co!ered under this part o Power to call "or certain in"or%ation+ etc( o :pecial pro!isions( o Power to %ake declaration( o Conse*uences o" a declaration under section 7?B( o 'eposit o" cash and preser!ation o" assets+ etc( o :tate%ent o" assets and lia$ilities to $e su$%itted to :tate Bank( o Conse*uential pro!isions "or winding up+ etc( B7 /art M??? Sus(ension o% &usiness and 'inding u( o% &an$ing Com(anies "ollowing topics are co!ered under this part o 34 1igh Court de"ined( Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU o ;estriction on stay order( o ;estriction on co%pro%ise or arrange%ent $etween $anking co%panies and creditors( o Power o" :tate Bank to apply to /ederal >o!ern%ent "or suspension o" $usiness $y a $anking co%pany and to prepare sche%e o" reconstruction or a%alga%ation( o Procedure "or a%alga%ation o" $anking co%panies( o <inding up $y 1igh Court( o Court Li*uidator( o :tate Bank to $e =""icial Li*uidator( o 4pplication o" Co%panies 4ct to Li*uidators( o :tay o" Proceedings( o Preli%inary report $y o""icial li*uidator( o Notice to pre"erential clai%ants and secured and unsecured creditors( o Power to dispense with %eetings o" creditors+ etc( o Booked depositorsE credits to $e dee%ed pro!ed( o Pre"erential pay%ents to depositors( o ;estriction on !oluntary winding up( 61 /art M?V S(ecial /rovisions %or S(eed# 7is(osal o% 2inding u( /roceedings "ollowing topics are co!ered under this part o o o o o o o o o o o o o o o o o o o o o o Power o" 1igh Court to decide all clai%s in respect o" $anking co%panies( #rans"er o" pending proceedings( :ettle%ent o" list o" de$tors( :pecial pro!isions to %ake calls on contri$utories( 'ocu%ents o" $anking co%pany to $e e!idence( Pu$lic e9a%ination o" directors and auditors( :pecial pro!isions "or assessing da%ages against delin*uentdirectors+ etc( 'uty o" directors and o""icers o" $anking co%pany to assist in the realisation o" property( :pecial pro!isions "or punishing o""ences in relation to $anking co%panies $eing wound up( Pu$lic e9a%ination o" directors and auditors+ etc(+ in respect o" a $anking co%pany under sche%e o" arrange%ent( :pecial pro!isions "or $anking co%panies working under sche%e o" arrange%ent at the co%%ence%ent o" the =rdinance( 4ppeals( :pecial period o" li%itations( :tate Bank to tender ad!ice in winding up proceedings( Power to inspect( Power to call "or returns and in"or%ation( 'istrict -agistrate to assist( o""icial li*uidator in taking charge o" property o" $anking co%pany $eing wound up( )n"orce%ent o" orders and decisions o" 1igh Court( C7 Power o" 1igh Court to %ake rules( C7 ;e"erences to directors+ etc(+ shall $e construed as including re"erences to past directors+ etc( Part ,, not to apply to $anking co%panies $eing wound up( Validation o" certain proceedings(
/art++?VA &an$ing Mo)tasib "ollowing topics are co!ered under this part o 4ppoint%ent o" -ohtasi$( Copyright Virtual ni!ersity o" Pakistan
35
Banking Laws and Practices-BNK 601 o #er%s and conditions o" the Banking -ohtasi$( o ( ;e"erence to Banking -ohtasi$ $y Court( o Procedure "or %aking co%plaints( o ;eco%%endations "or i%ple%entation o Power to call "or in"or%ation( o ;eport o" Banking -ohtasi$(
VU
/art MV Miscellaneous "ollowing topics are co!ered under Part V o Penalties( o 'ishonest re%o!al o" pledged goods( o Cogni2ance o" o""ences+ etc( o 4pplication o" "ines( o :pecial pro!isions "or pri!ate $anking co%panies( o ;estriction on acceptance o" deposits withdraws a$le $y che*ues( 5B o Change o" na%e $y a $anking co%pany( o 4lteration o" %e%orandu% o" a $anking co%pany( o Certain clai%s "or co%pensation $arred( o 4pplication o" certain pro!isions to $anking co%pany incorporated $y special enact%ents o" the /ederal Legislature( o 4pplication o" other laws $arred( o ;e%o!al o" di""iculties( o Power o" /ederal >o!ern%ent to %ake rules( o Power to e9e%pt in certain cases( o )9e%ption o" =""icers+ etc(+ "ro% lia$ility o )9e%ption "ro% re*uire%ent o" license( o )9change o" in"or%ation( o Continuance o" charge and priority( o Protection o" action taken in good "aith( 5C Statutor# de%initions: <e shall discuss the statutory de"initions as contained in section B o" the ordinance+ de"initions o" ban$ing and ban$ing com(an# ha!e already $een $rie"ly discussed and we shall "ocus on e9planation o" i%portant aspects in co%ing Lessons(
36
Banking Laws and Practices-BNK 601 &AN>?NG COM/AN?ES OR7?NANCE, -.! Statutor# de%initions #hese de"initions as contained in section B o" the ordinance are gi!en $elow&
VU LESSON 8
3a8 Fappro!ed securitiesG %eans the securities in which a trustee %ay in!est %oney under clause 3a8+ clause 3$8+ clause 3$$8+ clause 3c8 or clause 3d8 o" section @0 o" the #rust 4ct+ 1CC@ 3,, o" 1CC@8+ and "or the purpose o"N 3i8 su$-section 3@8 o" section 1?+ includes such other securities as the /ederal >o!ern%ent %ay+ $y noti"ication in the o""icial >a2ette+ declare to $e appro!ed securities "or the purpose o" that su$sectionJ and 3ii8 su$-section 318 o" section @5+ includes such types o" Pakistan rupee o$ligations o" the /ederal >o!ern%ent or a Pro!incial >o!ern%ent or o" a Corporation wholly owned or controlled+ directly or indirectly+ $y the /ederal >o!ern%ent or a Pro!incial >o!ern%ent and guaranteed $y the /ederal >o!ern%ent as the /ederal >o!ern%ent %ay+ $y noti"ication in the o""icial >a2ette+ declare+ to the e9tent deter%ined "ro% ti%e to ti%e+ to $e appro!ed securities "or the purpose o" that su$-sectionJ1 3$8 F$ankingG %eans the accepting+ "or the purpose o" lending or in!est%ent+ o" deposits o" %oney "ro% the pu$lic+ repaya$le on de%and or otherwise+ and withdraw a$le $y che*ue+ dra"t+ order or otherwiseJ 3c8 F$anking co%panyG %eans any co%pany which transacts the $usiness o" $anking in Pakistan and includes their $ranches and su$sidiaries "unctioning outside Pakistan o" $anking co%panies incorporated in Pakistan@J EB(lanationCD 4ny co%pany which is engaged in the %anu"acture o" goods or carries on any trade and which accepts deposits o" %oney "ro% the pu$lic %erely "or the purpose o" "inancing its $usiness as such %anu"acturer or trader shall not $e dee%ed to transact the $usiness o" $anking within the %eaning o" this clauseJ 3d8 F$ranchG or F$ranch o""iceG+ in relation to a $anking co%pany+ %eans any $ranch or $ranch o""ice+ whether called a pay o""ice or su$-pay o""ice or $y any other na%e+ at which deposits are recei!ed+ che*ues cashed or %oneys lent+ and "or the purposes o" section 70 includes any place o" $usiness where any other "or% o" $usiness re"erred to in su$-section 318 o" section 6 is transactedJ 3dd8FcreditorG includes persons "ro% who% deposits ha!e $een recei!ed on the $asis o" participation in pro"it and loss and a $anking co%pany or "inancial institution "ro% which "inancial acco%%odation or "acility has $een recei!ed on the $asis o" participation in pro"it and loss+ %ark-up in price+ hirepurchase+ lease+ or otherwiseJ General Conce(t o% Creditor /ro% this de"inition+ it is transpired that a $anker can $e a de$tor as well as a creditor depending upon the nature o" transaction( <hen the $anker accepts deposits "ro% his custo%ers the $ank $eco%es de$tor and the custo%er is treated as creditor( 1owe!er when a custo%er a!ails a loan or "inance "ro% the $ank+ the $anker $eco%es creditor and custo%er shall $e de$tor( #his relationship shall $e e9plained in detailed while discussing $ankerEs custo%erEs relationship( 1owe!er sa%e is $rie"ly discussed "or understanding the said de"inition( 4 $ank per"or%s a nu%$er o" "unctions "or the custo%er( 4"ter the account in the $ank is opened and the relationship o" a $anker and custo%er is esta$lished+ the $ank not only undertakes to collect the che*ues which are deposited in the account $ut also %akes the pay%ent on $ehal" o" the custo%er+ whene!er there is a %andate "ro% the custo%er( #he che*ues which are reali2ed $y the $ank are deposited in this account o" the custo%er and on %any occasions+ the $ank per"or%s certain other "unctions on $ehal" o" the custo%er such as keeping the !alua$les+ etc(+ deposited $y the custo%er with the $ank as a trustee( =n %any occasions+ when the custo%er gi!es $ills "or collection to his $ank and Copyright Virtual ni!ersity o" Pakistan 37
Banking Laws and Practices-BNK 601 VU the said $ank passes the $ills "or collection to another $ank and the a%ount o" the $ills is reduced as a result o" de$iting the custo%erHs account with collection charges as a result o" an agree%ent $etween two $anks+ the $ank is always acting on $ehal" o" the custo%er( #here are thus too %any occasions relating to so %any %atters which arise during the %utual dealings $etween the $anker and the custo%er and at each ti%e+ a *uestion arises as to what is the relationship $etween a $anker and a custo%er <hen a $ank grants loan or other credit "acilities to the custo%er+ relationship is re!ersed+ that is now Customer is 7ebtor E Banker is Creditor ,n such cases it is not the %oney o" the custo%er in the hands o" the $anker $ut it is the %oney o" the $ank in the hands o" the custo%er $ut in all such cases when a custo%erEs account is o!er drawn+ the custo%er does not cease to $e a custo%er( 3e8 Fco%panyG %eans any co%pany which %ay $e wound up under the Co%panies =rdinance+ 15C7 3SLV,, o" 15C78 and includes a $ranch o" a "oreign $anking co%pany doing $anking $usiness in Pakistan under a license issued $y the :tate Bank in this $ehal"J 3ee8 F'e$torG includes a person to who%+ or a $anking co%pany or "inancial institution to which+ "inance as de"ined in the Banking #ri$unals =rdinance 15C7+ has $een pro!idedJ 3"8 F'e%and lia$ilitiesG %eans lia$ilities which %ust $e %et on de%and+ and Fti%e lia$ilitiesG %eans lia$ilities which are not de%and lia$ilitiesJ 3""8 F/a%ily %e%$ersG in relation to a person %eans his spouse+ dependent lineal ascendants and descendants and dependent $rothers and sistersJ 3""a8 F"oreign $anking co%panyG %eans a $anking co%pany+ not incorporated in Pakistan+ which has a $ranch or $ranches doing $anking $usiness in Pakistan under a license issued $y :tate Bank in this $ehal"J 3g8 F>oldG includes gold in the "or% o" coin+ whether legal tender or not+ or in the "or% o" $ullion or ingot+ whether re"ined or notJ 3gg8F loans+ ad!ances+ and creditG includes F"inanceG as de"ined in the Banking #ri$unals =rdinance+ 15C7J #he a$o!e de"inition is a re"erral de"inition( 'e"inition o" "inance as contained in Banking #ri$unal =rdinance+ 15C7 is reproduced here under& K/inanceE includes an acco%%odation or "acility under a syste% which is not $ased on interest $ut pro!ided on the $asis o" participation in pro"it and loss+ %ark-up or %ark-down in price+ hire-purchase+ lease+ rent sharing+ licensing+ charge or "ee o" any kin+ purchase and sale o" any property+ including co%%odities+ patents+ designs+ trade %arks and copy rights+ $ills o" e9change+ pro%issory notes or other instru%ents with or without $y-$ack arrange%ent $y a seller+ participation ter% certi"icate+ %usharika certi"icate+ %odara$a certi"icate+ ter% "inance certi"icate or any other %ode other than an acco%%odation or "acility $ased on interest and also includes guarantees+ inde%nities and any other o$ligation+ "acility the real $ene"iciary whereo" is a person other than the person to who% or in whose na%e it was pro!ided 3h8 F%anaging directorG+ in relation to a $anking co%pany+ %eans a director who+ $y !irtue o" an agree%ent with the $anking co%pany or o" a resolution passed $y the $anking co%pany in general %eeting or $y its Board o" 'irectors or+ $y !irtue o" its %e%orandu% or articles o" association+ is entrusted with the %anage%ent o" the whole+ or su$stantially the whole o" the a""airs o" the co%pany+ and includes a director occupying the position o" a %anaging director+ $y whate!er na%e calledJ 3i8 FPrescri$edG %eans prescri$ed $y rules %ade under this =rdinanceJ 38 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU 3D8 FPri!ate co%panyG has the sa%e %eaning as in the Co%panies =rdinance+ 15C7 3SLV,, o" 15C78J 3k8 F;egistrarG has the sa%e %eaning as in+ the Co%panies =rdinance+ 15C7 3SLV,, o" 15C78J 3l8 F:cheduled $ankG has the sa%e %eaning as in the :tate Bank o" Pakistan 4ct+ 15B6 3SSS,,, o" 15B68J #his is a re"erral de"initionJ the sa%e as contained in :tate Bank o" Pakistan 4ct 15B6 is gi!en here under& JSc)eduled ban$M %eans a $ank "or the ti%e $eing included in the list o" $anks %aintained under su$-section 318 o" :ection ?6J :u$ section 318 o" :ection ?6 is also reproducing "or ready re"erence( 3,8 #he Bank shall %aintain at all its o""ices and $ranches an up-to-date list o" $anks declared $y it to $e scheduled $anks under Clause 3a8 o" su$-section 3@8( 3%8 Fsecured loan or ad!anceG %eans a loan or ad!ance %ade on the security o" assets the %arket !alue o" which is not at any ti%e less than the a%ount o" such loan or ad!ance+ and Funsecured loan or ad!anceG %eans a loan or ad!ance not so secured+ or that part o" it which is not so securedJ 3%%8 FsecuritiesG includes securities as de"ined in the Capital ,ssues 3Continuance o" Control8 4ct+ 1576 3SS,S o" 15768+ 3n8 F:tate BankG %eans the :tate Bank o" PakistanJ 3o8 Fsu$stantial interestG in an undertaking shall $e dee%ed to $e possessed $y a person i" he or any o" his "a%ily %e%$ers is the owner+ director or o""icer o" or has control o!er the undertaking or i" he or any o" his "a%ily %e%$ers holds shares carrying not less than twenty per cent o" the !oting power in such undertakingJ EB(lanation( N /or the purpose o" this clause+N 3i8 FcontrolG in relation to an undertaking+ %eans the power to e9ercise a controlling in"luence o!er the %anage%ent or the policies o" the undertaking+ and+ in relation to shares+ %eans the Power to e9ercise a controlling in"luence o!er the !oting power attached to such sharesJ 3ii8 FPersonG includes a 1indu undi!ided "a%ily+ a "ir%+ an association or $ody o" indi!iduals+ whether incorporated or not+ a co%pany and e!ery other Duridical personJ and 3iii8FundertakingG %eans any concern+ institution+ esta$lish%ent or enterprise engaged in the production+ supply or distri$ution o" goods+ or in the pro!ision or control o" any ser!ices relating to the pro!ision o" $oard+ lodging+ transport+ entertain%ent or a%use%ent+ or o" "acilities in connection with the supply o" electrical or other energy+ or to the pur!eying o" news+ insurance or in!est%ent( T)e Ordinance s)all override memorandum, articles, etc o% &an$ing Com(an# under section . o% t)e Ordinance: #he pro!isions o" this =rdinance shall ha!e e""ect notwithstanding anything to the contrary contained in the %e%orandu% or articles o" a $anking co%pany+ or in any agree%ent e9ecuted $y it+ or in any resolution passed $y the $anking co%pany in general %eeting or $y its Board o" 'irectors+ whether the sa%e $e registered+ e9ecuted or passed+ as the case %ay $e+ $e"ore or a"ter the co%%ence%ent o" this =rdinanceJ and 4ny pro!ision contained in the %e%orandu%+ articles+ agree%ent or resolution a"oresaid shall+ to the e9tent to which it is repugnant to the pro!isions o" this =rdinance+ $eco%e or $e !oid+ as the case %ay $e( -e%orandu% o" 4ssociations and 4rticle o" 4ssociations are !ery i%portant concepts with regard to any co%pany weather a $anking co%pany or a non $anking co%pany( #he concepts are e9plained $elow& Memorandum o% Association -e%orandu% o" association is a legal docu%ent "or incorporation o" a co%pany Copyright Virtual ni!ersity o" Pakistan 39
Banking Laws and Practices-BNK 601 VU -e%orandu% o" association is a "unda%ental legal docu%ent on the $asis o" which the co%pany conducts its e9ternal a""airs( #his docu%ent signi%ies t)e (o'ers o% t)e com(an# as well as the limitations o% t)e com(an#( ,t contains in"or%ation regarding the purpose+ capital+ and place o" $usiness+ lia$ility o" the %e%$ers and ac*uisition o" shares $y the su$scri$ers( Contents o% MemorandumDt)ese are discussed belo': -e%orandu% o" association is re*uired to $e su$scri$ed $y at least three persons in case o" pu$lic co%pany and at least $y one person in case o" pri!ate co%pany( Na%e Pro!ince in which the registered o""ice o" the co%pany is to $e located( =$Dects Lia$ility o" the %e%$ersNli%ited or unli%ited 4uthori2ed capital
Memorandum o% com(an# limited b# s)aresC T)is is contained in Section . o% t)e ordinance ')ic) is re(roduced belo'C aC ,n the case o" a co%pany li%ited $y shares+the %e%orandu% shall state-the na%e o" the co%pany with the word Mli%itedM as the last word o" the na%e in the case o" a pu$lic li%ited co%pany+ and the parenthesis and words M3Pri!ate8 Li%itedM as the last words o" the na%e in the case o" a pri!ate li%ited co%pany+ iiC the Pro!ince or the part o" Pakistan not "or%ing part o" a Pro!ince+ as the case %ay $e+ in which the registered o""ice o" the co%pany is to $e situateJ iiiC the o$Dects o" the co%pany+ and e9cept in the case o" a trading corporation the territories to which they e9tendJ ivC that the lia$ility o" the %e%$ers is li%itedJ and vC the a%ount o" share capital with which the co%pany proposes to $e registered+ and the di!ision thereo" into shares o" a "i9ed a%ount& bC No su$scri$er o" the %e%orandu% shall take less than one shareJ and cC )ach su$scri$er o" the %e%orandu% shall write opposite to his na%e the nu%$er o" shares he takes( Memorandum o% com(an# limited b# guarantee: sec 5 ,n the case o" a co%pany li%ited $y guarantee+a( whether or not the co%pany has a share capital+ the %e%orandu% shall statethe na%e o" the co%pany with the parenthesis and words M3>uarantee8 Li%itedM as the last words o" its na%eJ iiC the Pro!ince or the part o" Pakistan not "or%ing part o" a Pro!ince+ as the case %ay $e+ in which registered o""ice o" the co%pany is to $e situateJ iiiC the o$Dects o" the co%pany+ and+ e9cept in the case o" a trading corporation+ the territories to which they e9tendJ ivC that the lia$ility o" the %e%$ers is li%itedJ and vC that each %e%$er undertakes to contri$ute to the assets o" the co%pany in the e!ent o" its $eing wound up while he is a %e%$er+ or within one year a"terwards+ "or pay%ent o" the de$ts and lia$ilities o" the co%pany contracted $e"ore he ceases to $e a %e%$er+ and o" costs+ charges and e9penses o" winding up+ and "or adDust%ent o" the rights o" the contri$utories a%ong the%sel!es+ such a%ount as %ay $e re*uired+ not e9ceeding a speci"ied a%ountJ and $( i" the co%pany has a share capital+-iC #he %e%orandu% shall also state the a%ount o" share capital with which the co%pany proposes to $e registered and the di!ision thereo" into shares o" a "i9ed a%ount& Copyright Virtual ni!ersity o" Pakistan 40 iC iC
Banking Laws and Practices-BNK 601 iiC no su$scri$er o" the %e%orandu% shall take less than one share& and iiiC )ach su$scri$er shall write opposite to his na%e the nu%$er o" shares he takes( Memorandum o% unlimited com(an#: sec 6 ,n the case o" an unli%ited co%panyN aC whether or not the co%pany has a share capital+ the %e%orandu% shall stale
VU
the na%e o" the co%panyJ the Pro!ince or the part o" Pakistan not "or%ing part o" a Pro!ince+ as the case %ay $e+ in which the registered o""ice o" the co%pany is to $e situateJ and iiiC the o$Dects o" the co%pany+ and+ e9cept in the case o" a trading corporation+ the territories to which they e9tendJ and bC i" the co%pany has a share capital+iC iiC No su$scri$er o" the %e%orandu% shall take less than one shareJ and )ach su$scri$er shall write opposite to his na%e the nu%$er o" shares he takes
iC iiC
Re:uirements o% memorandum /ollowing re*uire%ents %ust $e "ul"illed $e"ore su$%ission o" the %e%orandu% o" association to the ;egistrar( ;e*uired to $e printed :hould $e di!ided into paragraphs Paragraphs to $e consecuti!ely nu%$ered #o $e signed $y the su$scri$ers :ignatures duly witnessed $y at least one witness :ignature o" each su$scri$er to $e attested $y the witness Co%plete address. occupation o" the su$scri$er to $e %entioned( 4ddress+ occupation o" the witness to $e %entioned -e%orandu% to $e duly sta%ped under sta%p 4ct( Articles o% Associations 4rticle o" association is another i%portant legal docu%ent which is su$ordinate to %e%orandu% o" association( ,t is concerned with the internal conduct and control o" the co%pany( Articles o% association as (rovided in section ! ; < ;i< --MarticlesJ %eans the articles o" association o" a co%pany as originally "ra%ed or as altered in accordance with the pro!isions o" any pre!ious Co%panies 4ct+ or o" this =rdinance+ including+ so "ar as they apply to the co%pany+ the regulations contained in #a$le 4 in the /irst :cheduleJ Contents o% Articles o% association is com(rised o% (rovisions, rules o% Articles o% Association: ;egulations concerning the internal %anage%ent o" the co%pany which is outlined here under& 'e"inition o" i%portant ter%s ,ssue o" shares and allot%ent o" shares :hare capital+ rights o" share holders( #rans"er o" shares 4lteration o" share capital 'i!idend 'irectorsNappoint%ent+ election+ re%o!al+ powers+ duties Copyright Virtual ni!ersity o" Pakistan 41
Banking Laws and Practices-BNK 601 -eetings+ !oting+ powers Borrowing powers 4ccounts and 4udit <inding up
VU
Registration o% articles is contained in section !. ')ic) is given belo': C #here %ay+ in the case o" a co%pany li%ited $y shares+ and there shall+ in the case o" a co%pany li%ited $y guarantee or an unli%ited co%pany+ $e registered with the %e%orandu%+ articles o" association signed $y the su$scri$ers to the %e%orandu% and setting out regulations "or the co%pany( !C 4rticles o" association %ay adopt all or any o" the regulations contained in #a$le 4 in the /irst :chedule( *C ,n the case o" an unli%ited co%pany or a co%pany li%ited $y guarantee+ the articles+ i" the co%pany has a share capital+ shall state the a%ount o" share capital with which the co%pany proposes to $e registered( 1C ,n case o" an unli%ited co%pany or a co%pany li%ited $y guarantee+ i" the co%pany has not a share capital+ the articles shall state the nu%$er o" %e%$ers with which the co%pany proposes to $e registered 0C ,n the case o" a co%pany li%ited $y shares and registered a"ter the co%%ence%ent o" this =rdinance+ i" articles are not registered+ or+ i" articles are registered+ in so "ar as the articles do not e9clude or %odi"y the regulations in #a$le 4 in the /irst :chedule+ those regulations shall+ so "ar as applica$le+ $e the regulations o" the co%pany in the sa%e %anner and to the sa%e e9tent as i" they were contained in duly registered articles( .C #he articles o" e!ery co%pany shall $e e9plicit and without a%$iguity and+ without preDudice to the generality o" "oregoing+ shall list and enu%erate the !oting and other rights attached to the di""erent classes o" shares and other securities+ i" any+ issued or to $e issued $y it( Alteration o% articles: sec !6 :u$Dect to the pro!isions o" this =rdinance and to the conditions contained in its %e%orandu%+ a co%pany %ay $y special resolution alter or add to its articles+ and any alteration or addition so %ade shall $e as !alid as i" originally contained in the articles+ and $e su$Dect in like %anner to alteration $y special resolution& Pro!ided that+ where such alteration a""ects the su$stanti!e rights or lia$ilities o" %e%$ers or o" a class o" %e%$ers+ it shall $e carried out only i" a %aDority o" at least three-"ourth o" the %e%$ers or o" the class o" %e%$ers a""ected $y such alteration+ as the case %ay $e+ personally or through pro9y !ote "or such alteration( "orm o% memorandum and articles: sec !aC #he "or% o" %e%orandu% o" articles shall $e in accordance with the "or%s set out in ta$les+ B+C+' and ) o" the "irst schedule the %e%orandu% o" association o" a co%pany li%ited $y sharesJ bC #he %e%orandu% and articles o" association o" a co%pany li%ited $y guarantee and not ha!ing a share capitalJ cC the %e%orandu% and articles o" association o" a co%pany li%ited $y guarantee and ha!ing a share capitalJ dC #he %e%orandu% and articles o" association o" an unli%ited co%pany ha!ing a share capitalJ Registration o% memorandum and articles, etc: sec *8 C #he %e%orandu% and the articles+ i" any+ shall $e "iled with the registrar in the Pro!ince or the part o" Pakistan not "or%ing part o" a Pro!ince+ as the case %ay $e+ in which the registered o""ice o" the co%pany is stated $y the %e%orandu% to $e situated( 42 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU !C 4 declaration $y such person as %ay $e prescri$ed in this $ehal"+ or $y a person na%ed in the articles as a director+ or other o""icer o" co%pany+ o" co%pliance with all or any o" the re*uire%ents o" this =rdinance and the rules %ade there under shall $e "iled with the registrarJ and the registrar %ay accept such a declaration as su""icient e!idence o" such co%pliance( *C ," the registrar is satis"ied that the co%pany is $eing "or%ed "or law"ul purposes+ that none o" its o$Dects stated in the %e%orandu% is inappropriate or decepti!e or insu""iciently e9pressi!e and that all the re*uire%ents o" this =rdinance and the rules %ade there under ha!e $een co%plied with in respect o" registration and %atters precedent and incidental thereto+ he shall retain and register the %e%orandu% and articles( i" any( 1C ," registration o" the %e%orandu% is re"used+ the su$scri$ers o" the %e%orandu% or any one o" the% authori2ed $y the% in writing %ay either supply the de"iciency and re%o!e the de"ect pointed out+ or within thirty days o" the order o" re"usal pre"er an appeal-3a8 where the order o" re"usal has $een passed $y an additional registrar+ a Doint registrar+ a deputy registrar or an assistant registrar+ to the registrarJ and 3$8 where the order o" re"usal has $een passed+ or upheld in appeal+ $y the registrar+ to the 4uthority( 0C 4n order o" the 4uthority under su$section 378 shall $e "inal and shall not $e called in *uestion $e"ore any Court or other authority(
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Banking Laws and Practices-BNK 601 &AN>?NG COM/AN?ES OR7?NANCE, -.!
VU LESSON 9
"orms o% business carried out b# a ban$ing com(an# under section 5 o% t)e Ordinance: 4 $anking co%pany %ay engage in any one or %ore o" the %ollo'ing %orms o% business+ na%ely& o Borrowing+ raising+ or taking up o" %oneyJ o the lending or ad!ancing o" %oney either upon or without securityJ o the drawing+ %aking+ accepting+ discounting+ $uying+ selling+ collecting and dealing in $ills o" e9change+ hundies+ pro%issory notes+ coupons+ dra"ts+ $ills o" lading+ railway receipts+ warrants+ de$entures+ certi"icates+ T#he di""erent instru%ents such as $ill o" e9change can $e drawn+ discounted and endorsed under the pro!isions o" this =rdinance( 4ll instru%ents including pro%issory notes+ $ills+ $ills o" lading+ dra"ts and de$entures play an i%portant role in !arious transactions carried out $y the $anks and pro!ide li*uidity to "inancial syste%( ;ole o" $ill o" e9change is particularly !ery i%portant( <e shall discuss the concept o" $ill o" e9change in greater details( :o%e aspects o" $ill o" e9change are discussed so that the purpose and scope o" these pro!isions %ay $e duly understood( &ill o% eBc)ange is an im(ortant t#(e o% negotiable instruments, and )as been de%ined in section 0 o% t)e Negotiable ?nstruments Act, 66 N t)e said de%inition is re(roduced belo': F4 $ill o" e9change is an instru%ent in writing containing an unconditional order+ signed $y %aker+ directing a certain person+ to pay on de%and or at "i9ed or deter%ina$le "uture ti%e a certain su% o" %oney only to+ or to the order o"+ a certain person or to the $earer o" the instru%entG( ?ngredients o% a bill o% eBc)ange :o%e o" the ingredients o" $ill o" e9change are outlined $elow& C ,t %ust in writing !C ,t %ust contain an order to pay and addressed to so%e person *C #he order %ust $e unconditional 1C #he order %ust $e signed $y the %aker 0C #he order %ust direct to pay on de%and or at a "i9ed or deter%ina$le "uture ti%e( .C #he su% ordered to $e paid %ust $e certain( 5C #he pay%ent should $e ordered to $e paid to a certain person+ or to his order+ or to the $earer( "eatures o% a bill o% eBc)ange /eatures o" $ill o" e9change are discussed $elow& 4 pro%ise or order to pay is not conditional $y reason o" the ti%e "or pay%ent o" the a%ount or any install%ent thereo" $eing e9pressed to $e on the lapse o" a certain period a"ter the occurrence o" a speci"ied e!ent which+ according to the ordinary e9pectation o" %ankind+ is certain to happen+ although the ti%e o" its happening %ay $e uncertain( #he su% paya$le %ust $e FcertainG within the %eaning o" this section and section 7+ although it includes "uture interest or return in any other "or% or is paya$le at an indicated rate o" e9change+ or is paya$le at the current rate o" e9change and although it is to $e paid in stated install%ents and contains a pro!ision that on de"ault o" pay%ent o" one or %ore install%ents or interest or return in any other "or% the whole or the unpaid $alance shall $eco%e due( 4 pro%ise to pay or order to pay is not KconditionalE nor is the su% paya$le uncertain within the %eaning o" this section or section 7 $y reason o" the su% paya$le $eing su$Dect to adDust%ent "or pro"it or loss+ as the case %ay $e o" the $usiness o" the %aker( <here the person intended can reasona$ly $e ascertained "ro% the pro%issory note or the $ill o" e9changeJ he is a Kcertain personE within the %eaning o" this section and section 7+ although he is %isna%ed or designated $y description only( Copyright Virtual ni!ersity o" Pakistan 44
VU
4n order to pay out o" a particular "und is not unconditional within the %eaning o" this sectionJ $ut an un*uali"ied order to pay+ coupled withN ;c< an indication o" a particular "und out o" which the drawer is to rei%$urse hi%sel" or a particular account to $e de$ited to the a%ount+ or O ;d< a state%ent o" the transaction which gi!es rise to the note o" $ill+ in unconditional 4n essential character o" a $ill o" e9change is that it shall contain an order to accept or to pay and that acceptor should accept it+ in the a$sence o" such a direction to pay the docu%ent will not $e a $ill o" e9change or a hundi( Besides the "or%s discussed a$o!e "ollowing "or%s o" $usiness %ay also $e carried out $y a $anking co%pany( o 'ealing in 3participation ter% certi"icates+ ter% "inance certi"icates+ %usharika certi"icatesJ %odara$a certi"icates and such other instru%ents as %ay $e appro!ed $y the :tate Bank8 and other instru%ents( #he :tate Bank o" Pakistan issues securities on $ehal" o" go!ern%ent o" Pakistan( Concept and scope o" go!ern%ent securities is e9plained $elow& Government Securities shall include such types o" Pak( ;upee o$ligations o" the /ederal >o!ern%ent or a Pro!incial >o!ern%ent or o" a Corporation wholly owned or controlled+ directly or indirectly+ $y the /ederal >o!ern%ent or a Pro!incial >o!ern%ent and guaranteed $y the /ederal >o!ern%ent as the /ederal >o!ern%ent %ay+ $y noti"ication in the =""icial >a2ette+ declare+ to the e9tent deter%ined "ro% ti%e to ti%e+ to $e >o!ern%ent :ecurities(U #he granting and issuing o" letters o" credit( nder the pro!isions o" this =rdinance+ $anking co%panies %ay engage in non "unded "acilities particularly letter o" credit $esides "unded "acilities( #he concept o" the letter o" credit is discussed in the "ollowing paragraphs& o 4etter o% Credit in general terms is de%ined as under: K4 letter o" credit can $e de"ined as an instru%ent issued $y a $ank in which the $ank "urnishes its credit which is $oth good and well known+ in place o" the $uyerEs credit+ which %ay $e good $ut is not so well known( 4 $ank issues a letter o" credit on $ehal" o" one o" its custo%ers authori2ing an indi!idual or "ir% to draw dra"t 3$ill o" e9change8 on the $ank or one o" its correspondents "or the $ankEs account under certain conditions stipulated in the credit( T)e instrument o% letter o% credit is governed b# Uni%orm Customs and /ractices %or documentar# credit, called UC/ .88 ')ic) is issued b# t)e international c)ambers o% commerceC According to UC/ .88, letter o% credit is de%ined as under: Credit %eans any arrange%ent+ howe!er na%ed or descri$ed that is irre!oca$le and there$y constitutes a de"inite undertaking o" the issuing $ank to honor a co%plying presentation( ?n a letter o% credit t)e %ollo'ing (arties are engaged: < 4pplicant 3opener o" L(C8& %eans the party on whose re*uest the credit is issued( !< ,ssuing $ank 3opening $ank8& %eans the $ank that issues a credit at the re*uest o" an applicant or on its own $ehal"( *< 4d!ising $ank& %eans the $ank that ad!ises the credit at the re*uest o" issuing $ank( 1< Con"ir%ing $ank& %eans the $ank that adds its con"ir%ation to a credit upon the issuing $ankEs authori2ation or re*uest( 0< Negotiating $ank& %eans the $ank where negotiation o" docu%ents is carried out( Negotiation %eans the purchase $y the no%inated $ank o" dra"ts and. or docu%ents under a co%plying presentation $y ad!ancing or agreeing to ad!ance "unds to the $ene"iciary on or $e"ore the $anking day on which rei%$urse%ent is due to the no%inated $ank( Copyright Virtual ni!ersity o" Pakistan 45
Banking Laws and Practices-BNK 601 VU .< No%inated Bank& %eans the $ank with which the credit is a!aila$le or any $ank in the case o" the credit a!aila$le with any $ank( "orm o% business in ')ic) a ban$ing com(an# ma# engage is continued belo': o ,ssuing o" tra!elerHs che*ues and circular notesJ o nderwriting and dealing in stock+ "unds+ shares+ de$entures+ de$enture stock+ $onds+ o$ligations+ securities 3participation ter% certi"icates+ ter% "inance certi"icates+ %usharika certi"icates+ %odara$a certi"icates and such other instru%ents as %ay $e appro!ed $y the :tate Bank8 and in!est%ent o" all kindsJ o #he purchasing and selling o" $onds+ scripts or other "or%s o" securities 3participation ter%s certi"icates+ ter% "inance certi"icates+ %usharika certi"icates+ %odara$a certi"icates and such other instru%ents as %ay $e appro!ed $y the :tate Banks8V on $ehal" o" constituents or others+ the negotiating o" loans and ad!ancesJ the recei!ing o" all kinds o" $onds+ scrips o" !alua$les on deposit or "or sa"e custody or otherwiseJ o Fthe pro!iding o" sa"e deposit !aultsG o Collecting and trans%itting o" %oney and securitiesJ o #he pro!iding o" "inance as de"ined in the Banking #ri$unals =rdinance+ 15C7(
'e"initions o" "inance as contained in the Banking #ri$unals =rdinance+ 15C7 is gi!en $elow& O"inance3 includes an acco%%odation or "acility under a syste% which is not $ased on interest $ut pro!ided on the $asis o" participation in pro"it and loss+ %ark-up or %ark-down in price+ hire-purchase+ lease+ rent sharing+ licensing+ charge or "ee o" any kind+ purchase and sale o" any property+ including co%%odities+ patents+ designs+ trade %arks and copy rights+ $ills o" e9change+ pro%issory notes or other instru%ents with or without $y-$ack arrange%ent $y a seller+ participation ter% certi"icate+ %usharika certi"icate+ %odara$a certi"icate+ ter% "inance certi"icate or any other %ode other than an acco%%odation or "acility $ased on interest and also includes guarantees+ inde%nities and any other o$ligation+ "acility the real $ene"iciary whereo" is a person other than the person to who% or in whose na%e it was pro!ided(U "orm o% business in ')ic) a ban$ing com(an# ma# engage is discussed belo': o acting agents "or any >o!ern%ent or local authority or any other person or personsJ the carrying on o" agency $usiness o" any description including the clearing and "orwarding o" goods+ gi!ing o" receipts and discharges and otherwise acting as an attorney on $ehal" o" custo%ers+ $ut e9cluding the $usiness o" a %anaging agent or treasurer o" a co%pany( T4gency ser!ice is a !ery i%portant "unction o" a $ank and the relationship o" Principal and 4gent $etween custo%er and $anker is one o" i%portant relationships( #he agency relationship is e9plained in the "ollowing paragraphs& ,n general ter%s+ 4gency re"ers to the relationship which e9ists $etween two persons+ the /rinci(al and the Agent in which the 4gent has to per"or% di""erent duties. "unctions as per instructions o" the (rinci(al and also enters into contract with the third party . parties on $ehal" o" the principal( #he relationship o" agency plays an i%portant role in $usiness and co%%ercial dealings( #his relationship is legal created $y !irtue o" agree%ent $etween /rinci(al and Agent 7e%inition o% Agent and /rinci(al as contained in section 6! o% t)e Contract Act, 65! is given belo': Agent is a person e%ployed to do any act "or another or to represent another in dealing with a third persons( #he person "or who% such act is done+ or who is so represented+ is called the /rinci(alC EB(lanation #he legal relation $etween a %erchant in one country and a co%%ission agent in other is that o" 46 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU principal and agent+ and not seller and $uyer+ though this is consistent with the agent and principal+ when the agent consigns the goods to the principal+ $eing in a relation like that o" seller and $uyer "or so%e purposes( 4 %erchant+ there"ore+ in this country who orders goods through a "ir% o" co%%ission agents in )urope cannot hold the "ir% lia$le as i" they were !endors "or "ailure to deli!er the goods( 4nd the result is the sa%e i" the goods are ordered through a $ranch in this country o" a "ir% o" co%%ission agents in another country( /or the sa%e reason+ where a co%%ission agent $uys goods "or a %erchant at a price s%aller than the li%it speci"ied in the indent+ he cannot charge any price higher than that actually paid $y hi%+ e9cept in the case o" a custo% to the contrary( 4n agent %ay ha!e+ and o"ten has+ in "act+ a large discretion+ $ut he is $ound in law to "ollow the principalHs instructions pro!ided they do not in!ol!e anything law"ul( #o this e9tent an agent %ay $e considered itEs a superior kind o" ser!antJ and a ser!ant who is entrusted with any dealing with third persons on his %asterHs $ehal" is to that e9tent an agent( But a ser!ant %ay $e wholly without authority to do anything as an agent+ and agency+ in the case o" partners+ e!en an e9tensi!e agency+ %ay e9ist without any contract o" hiring and ser!ice( U "orm o% business is continued belo': o 4cting as F-odara$a Co%panyG under the pro!ision o" the -odara$a Co%panies and -odara$a 3/loatation and Control8 =rdinance+ 15C0( T#he de"inition o" %odara$a co%pany as contained in -odara$a =rdinance+ 15C0 is gi!en $elow& Modaraba Com(an# %eans a co%pany engaged in the $usiness o" "loating and %anaging %odara$a( #he de"inition o" the %odara$a is gi!en hereunder( -odara$a %eans a $usiness in which a person participates with his %oney and another with his e""orts or skill or $oth his e""orts and skill and shall include nit+ #rust and -utual /und $y whate!er na%e called( -odara$a certi"icate and -odara$a "und ha!e also $een de"ined in this =rdinanceJ the said de"initions are also gi!en here under "or ready re"erence( Modaraba Certi%icate: %eans a certi"icate o" de"inite deno%ination issued to the su$scri$er o" the %odara$a acknowledging receipt o" %oney su$scri$ed $y hi%( o o Contracting "or pu$lic and pri!ate loans and negotiating and issuing the sa%eJ #he e""ecting+ insuring+ guaranteeing+ underwriting+ participating in %anaging and carrying out o" an# issue pu$lic or pri!ate+ >o!ern%ent+ %unicipal or other loans or o% s)ares+ stock de$entures+ 3de$enture stock or other securities8 o" any co%pany+ corporation or association and the lending o" %oney "or the purpose o" any such issueJ Carrying on and transacting e!ery kind o" guarantee and inde%nity $usinessJ Purchase or ac*uisition in the nor%al course o" its $anking $usiness o" any property+ including co%%odities+ patents+ designs+ trade %arks and copyrights with or without $uy-$ack arrange%ents $y the seller+ or "or sale in the "or% o" hire-purchase or on de"erred pay%ent $asis with %ark-up or "or leasing or licensing or "or rent sharing or "or any other %ode o" "inancing -anaging+ selling and reali2ing any property which %ay co%e into the possession o" the co%pany in satis"action or part satis"action o" any o" its clai%sJ 4c*uiring and holding and generally dealing with any property or any right+ title or interest in any such property which %ay "or% security or part o" the security "or any loans or ad!ances or which %ay $e connected with any such secure
o o
o o
o ndertaking and e9ecuting trustsJ <e shall continue our discussion on this topic in the ne9t Lesson(
47
VU LESSON 10
"orms o% business carried out b# t)e ban$ing com(an# under section 5 o% t)e Ordinance: ,n pre!ious Lesson we ha!e discussed so%e "or%s o" $usiness that can $e carried out $y a $anking co%pany+ there are other "or%s o" $usiness that can $e carried out $y a $anking co%pany under the pro!isions o" this ordinance+ and the sa%e are enu%erated and discussed hereunder& o undertaking the ad%inistration o" estates as e9ecutor+ trustee or otherwiseJ T#he concept o" eBecutor, trustee and administrator is e9plained $elow( 4n e9ecutor is a person who is no%inated $y the testator 3writer o" the <ill8( #he authority in e9ecutor is !ested $y !irtue o" the <ill( )9ecutor has Dust to carry out the directions contained in the will( 1owe!er in certain cases+ the person appointed as e9ecutor %ay not ha!e the legal co%petency to e9ecute the <ill+ "or instance the person appointed as e9ecutor %ay $e a %inor and %inor is the person who does not ha!e the capacity to enter into any contract( 4s such in such situations+ the court o" law shall appoint a person as ad%inistrator to look a"ter to e9ecute the directions contained in the <ill( #he person who accepts the con"idence reposed under a trust is called the trustee( #he trust has $een de"ined in section ? o" the #rust 4ct 1CC@ as under& 4 MtrustJ is an o$ligation anne9ed to the ownership o" property+ and arising out o" a con"idence reposed in and accepted $y the owner+ or declared and accepted $y hi%+ "or the $ene"it o" another+ or o" another and the owner the person who reposes or declares the con"idence is called the Mauthor o" the trustM& the person who accepts the con"idence is called t)e JtrusteeM& the person "or whose $ene"it the con"idence is accepted is called the Jbene%iciar# M& the su$Dect %atter o" the trust is called Mtrust propertyM or Mtrust %oneyM& the Mbene%icial interestJ or MinterestM o" the $ene"iciary is his right against the trustee as owner o" the trust propertyJ and the instru%ent+ i" any+ $y which the trust is declared is called the M instrument o% trustM& a $reach o" any duty i%posed on a trustee+ as such+ $y any law "or the ti%e $eing in "orce+ is called a M$reach o" trustM& and in this 4ct+ unless there $e so%ething repugnant in the su$Dect or conte9t+ MregisteredM %eans registered under the law "or the registration o" docu%ents "or the ti%e $eing in "orce& a person is said to ha!e MnoticeM o" a "act either when he actually knows that "act+ or when+ $ut "or will"ul a$stention "ro% in*uiry or gross negligence+ he would ha!e known it+ or when in"or%ation o" the "act is gi!en to or o$tained $y his agent+ under the circu%stances %entioned in the Contract 4ct+ 1C6@+ section @@5J and all e9pressions used herein and de"ined in the Contract 4ct+ 1C6@+ shall $e dee%ed to ha!e the %eanings respecti!ely attri$uted to the% $y that 4ct( Purpose o" the trust %ust always $een law"ul+ this concept is contained in section 7 o" the 4ct which is reproduced "or re"erence& 4 trust %ay $e created "or any law"ul purpose( #he purpose o" a trust is law"ul unless it is aC /or$idden $y law+ or is o" such a nature that+ i" per%itted+ it would de"eat the pro!isions o" any law+ or bC ,s "raudulent+ or cC ,n!ol!es or i%plies inDury to the person or property o" another+ or dC #he Court regards it as i%%oral or opposed to pu$lic policy( )!ery trust o" which the purpose is unlaw"ul is !oid( 4nd where a trust is created "or two purposes+ o" which one is law"ul and the other unlaw"ul and the two purposes cannot $e separated+ the whole trust is !oid( EB(lanation ,n this section the e9pression MlawM includes+ where the trust property is i%%o!ea$le and situate in a "oreign country+ the law o" such country( 48 Copyright Virtual ni!ersity o" Pakistan
VU
"orm o% &usiness is continued belo': o )sta$lishing and supporting or aiding in the esta$lish%ent and support o" associations+ institutions+ "unds+ trusts and con!eniences calculated to $ene"it e%ployees or e9-e%ployees o" the co%pany or the dependents or connections o" such personsJ granting pensions and allowances and %aking pay%ents towards insuranceJ su$scri$ing to or guaranteeing %oneys "or charita$le or $ene!olent o$Dects or "or any e9hi$ition or "or any pu$lic+ general or use"ul o$DectJ #he ac*uisition+ construction+ %aintenance and alteration o" any $uilding or works necessary or con!enient "or the purpose o" the co%panyJ o selling+ i%pro!ing+ %anaging+ de!eloping+ e9changing+ leasing+ %ortgaging+ disposing o" or turning into account or otherwise dealing with all or any part o" the property and rights o" the co%panyJ -ortgage is a !ery i%portant concept particularly as collateral in lending operations( #he concept and scope o" %ortgage is e9plained in the "ollowing paragraphs( o -ortgage has $een de"ined in section BC o" the #rans"er o" Property 4ctJ the said de"inition is gi!en $elow& 3a8 4 %ortgage is the trans"er o" an interest in speci"ic i%%o!ea$le property "or the purpose o" securing the pay%ent o" %oney ad!anced or to $e ad!anced $y way o" loan+ an e9isting or "uture de$t+ or the per"or%ance o" an engage%ent which %ay gi!e rise to a pecuniary lia$ility( Mortgagor: #he trans"eror is called %ortgagor Mortgagee: #he trans"eree is called %ortgagee Mortgage Mone#: #he principal %oney and interest o" which pay%ent is secured "or the ti%e $eing are called the %ortgage-%oney Mortgage 7eed: #he instru%ent 3i" any8 $y which the trans"er is e""ected is called a %ortgage deed( Sco(e o% Mortgage: 4ccording to the pro!isions o" sec BC o" the 4ct+ -ortgages can $e %ade as outlined $elow& =" speci"ic i%%o!a$le property Purpose--securing the pay%ent o"& -oney ad!anced or to $e ad!anced $y way o" loan /or an e9isting de$t or "uture de$t or /or per"or%ance o" an engage%ent which %ay gi!e rise to pecuniary lia$ility
49
Banking Laws and Practices-BNK 601 VU Rig)ts o% Mortgagee -ortgagee has the right to sell the %ortgaged property in case o" de"ault $y %ortgagor( ;ight o" "ore-closure is also !ested in the %ortgagee( -ortgagee also has the right to "ile suit $e"ore a court o" law( T#(es o% Mortgages: ,n practice there are two types o" -ortgages which are gi!en $elow& Registered Mortgage E:uitable Mortgage Registered or 4egal Mortgage #his is created through a "or%al docu%ent called %ortgage deed( -ortgage deed is registered with the ;egistrar o" titles( ,t is co%parati!ely e9pensi!e as it in!ol!es sta%p duty and registration "ee( E:uitable Mortgage #his is created $y deposit o" title deed $y the %ortgagor( -e%orandu% regarding deposit o" title deed is also signed $y respecti!e parties( Clear title o" the %ortgagor %ust $e ascertained $y the %ortgagee(U "orm o% business+++ continued 4c*uiring and undertaking the whole or any part o" the $usiness o" any person or co%pany+ when such $usiness is o" a nature enu%erated or descri$ed in this su$-sectionJ o 'oing all such other things as are incidental or conduci!e to the pro%otion or ad!ance%ent o" the $usiness o" the co%panyJ o 4ny other "or% o" $usiness which the "ederal go!ern%ent %ay+ $y noti"ication in the o""icial ga2ette+ speci"y as a "or% o" $usiness in which it is law"ul "or a $anking co%pany to engage( o No $anking co%pany shall engage in any "or% o" $usiness other than those re"erred to in su$section 318( Use o% t)e 'ord L&an$P: Sec 6 )!ery co%pany carrying on the $usiness o" $anking in Pakistan shall use the word F$ankG+ or any o" its deri!ati!es as part o" its na%e and no co%pany other than a $anking co%pany shall use in its na%e any word calculated to indicate that it is a $anking co%pany& Pro!ided that nothing in this section shall apply tosu$sidiary o" a $anking co%pany "or%ed "or one or %ore o" the purpose %entioned in su$-section 318 o" :ection @? whose na%e indicates that it is a su$sidiary o" that $anking co%panyJ and Pro!ided that nothing in this section shall apply to- any association o" $anks "or%ed "or the protection o" their %utual interests and registered under section 7@ o" the Co%panies =rdinance 15C73SLV,, o" 15C78& Pro!ided "urther that the :tate Bank %ay+ su$Dect to such conditions+ i" any+ as it %ay dee% "it+ $y noti"ication in the =""icial >a2ette+ authori2e a co%pany+ not $eing a $anking co%pany to use in its na%e the word K$ankE or any o" its deri!ati!es /ro)ibition o% trading: Sec )9cept as authori2ed under section 6+ no $anking 50 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU co%pany shall directly or indirectly deal in the $uying or selling or $artering o" goods or engage in any trade or $uy+ sell or $arter goods "or others+ otherwise than in connection with $ills o" e9change recei!ed "or collection or negotiation( )9planation(W /or the purpose o" this section+ FgoodsG %eans e!ery kind o" %o!a$le property+ other than actiona$le clai%s+ stocks+ shares+ %oney+ $ullion and species+ and all instru%ents re"erred to in clause 3a8 o" su$-section 318 o" :ection 6( 7is(osal o% non+ban$ing assets: Sec 8 Notwithstanding anything contained in section 6+ no $anking co%pany shall hold 3e9cept as %ay $e per%itted $y the :tate Bank "ro% ti%e to ti%e or as is re*uired8 "or any period e9ceeding se!en years "ro% the ac*uisition thereo" or "ro% the co%%ence%ent o" this =rdinance+ whiche!er is later or any e9tension o" such period as in this section pro!ided+ and such property shall $e disposed o" within such period or e9tended period+ as the case %ay $e& Pro!ided that the $anking co%pany %ay+ within the period o" se!en years as a"oresaid+ deal or trade in any such property "or the purpose o" "acilitating the disposal thereo"& Pro!ided "urther that the :tate Bank %ay in any particular case e9tend the a"oresaid period o" se!en years $y such period not e9ceeding "i!e years where it is satis"ied that such e9tension would $e in the interests o" the depositors o" the $anking co%pany( )9planation(N/or the purpose o" this section property+ a su$stantial portion o" which is in use $y $anking co%pany "or its own genuine re*uire%ents shall $e dee%ed to $e property "or its own use( /ro)ibition o% em(lo#ment o% managing agents and restrictions on certain %orms o% em(lo#ment: ;Sec < ; 8 No $anking co%panyN 3a8 :hall e%ploy or $e %anaged $y a %anaging agentJ or 3$8 :hall e%ploy or continue the e%ploy%ent o" any personN <ho is+ or at any ti%e has $een+ adDudicated insol!ent or has suspended pay%ent+ or has co%pounded with his creditors+ or who is+ or has $een+ con!icted $y a cri%inal court o" an o""ence in!ol!ing %oral turpitudeJ and shall e%ploy or continue the e%ploy%ent o" any personN whose re%uneration or part o" whose re%uneration takes the "or% o" co%%ission or a share in the pro"its o" the co%pany& Pro!ided that nothing contained in su$-clause 3ii8 shall apply to the pay%ent $y a $anking co%pany o" any $onus in pursuance o" a settle%ent or award arri!ed at or %ade under any law relating to industrial disputes or in accordance with any sche%e "ra%ed $y such $anking co%pany or in accordance with the usual practice pre!ailing in $anking $usinessJ or any co%%ission to any $roker 3including guarantee $roker8+ cashier-contractor+ clearing and "orwarding agent+ auctioneer or any other person+ e%ployed $y the $anking co%pany under a contract otherwise than as a regular %e%$er o" the sta"" o" the co%panyJ or shall $e %anaged $y any personN ;i< <ho is a director o" any other co%pany not $eing a su$sidiary co%pany o" the $anking co%pany or a co%pany registered under section @6 o" the Co%panies 4ct+ 151? 3V,, o" 151?8+ e9cept with the pre!ious appro!al o" the :tate BankJ or shall $e %anaged $y any personN who is engaged in any other $usiness or !ocationJ or who has a contract with the co%pany "or its %anage%ent "or a period e9ceeding "i!e years at any one ti%e& Pro!ided that any contract with the co%pany "or its %anage%ent %ay $e renewed or e9tended "or a "urther period not e9ceeding "i!e years at a ti%e i" and so o"ten as the directors so decide& Pro!ided "urther that nothing in this clause shall apply to a director+ other than the %anaging director+ o" a $anking co%pany $y reason only o" his $eing such director( 3@8<here a person holding the o""ice o" a chair%an or director or %anager or chie" e9ecuti!e o""icer 3$y whate!er na%e called8 o" a $anking co%pany is+ or has $een "ound $y any tri$unal or other authority 3other than a cri%inal court8 to ha!e contra!ened the pro!ision o" any law and the :tate Bank is satis"ied that the contra!ention is o" such a nature that the association o" such person with the $anking Copyright Virtual ni!ersity o" Pakistan 51
Banking Laws and Practices-BNK 601 VU co%pany is or will $e detri%ental to the interest o" the $anking co%pany or its depositors or otherwise undesira$le+ the :tate Bank %ay %ake an order that person shall cease to hold the o""ice with e""ect "ro% such date as %ay $e speci"ied therein and thereupon+ that o""ice shall+ with e""ect "ro% the said date+ $eco%e !acant( 3?84ny order %ade under su$-section 3@8 in respect o" any person %ay also pro!ide that he shall not+ without the per!ious per%ission o" the :tate Bank in writing+ in any way+ directly or indirectly+ $e concerned with+ or take part in the %anage%ent o"+ the $anking co%pany or any other $anking co%pany "or such period not e9ceeding "i!e years as %ay $e speci"ied in the order( ;1<No order under su$-section 3@8 shall $e %ade in respect o" any person unless he has $een gi!en an opportunity o" %aking a representation to the :tate Bank against the proposed order& Pro!ided that it shall not $e necessary to gi!e any such opportunity i"+ in the opinion o" the :tate Bank+ any delay would $e detri%ental to the interests o" the $anking co%pany or its depositors( 3B84ny decision or order o" the :tate Bank %ade under this section shall $e "inal "or all purposes( Restrictions on removal o% records and documents: Sec ! No $anking co%pany shall re%o!e "ro% Pakistan to a place outside Pakistan any o" its records and docu%ents relating to its $usiness at is $ranches+ whether they are "unctioning or not+ without the prior per%ission in writing o" the :tate Bank( EB(lanationCD ,n this section the ter% FrecordsG %eans ledgers+ day $ooks+ cash $ooks+ accounts $ooks and all other $ooks used in the $usiness o" a $anking co%pany and the ter% Fdocu%entsG %eans !ouchers+ che*ues+ $ills+ pay orders+ securities "or ad!ances and any other docu%ents supporting entries in the $ooks o"+ or clai%s $y or against+ a $anking co%pany( /ro% the pro!isions o" section 1@ o" the ordinance it is %andatory "or a $anking co%pany to seek prior per%ission in writing in case it desires to shi"t any record "ro% Pakistan to any place outside Pakistan(
52
VU LESSON 11
?n t)is 4esson 'e s)all cover t)e %ollo'ing as(ects: o ;e*uire%ent as to %ini%u% paid-up capital and reser!e( o ;egulation o" paid-up capital su$scri$ed capital and authori2ed capital and !oting rights o" shareholders( o )lection o" new directors( o 4ppoint%ent o" director $y :tate Bank( o ;estriction on ter% o" o""ice o" directors( Re:uirement as to minimum (aid+u( ca(ital and reserves & these re*uire%ents are contained in section 1? o" the =rdinance which is reproduced hereunder "or re"erence( :u$Dect to su$-section 3@8 no $anking co%pany incorporated in Pakistan shall&N aC Co%%ence $usiness unless it has such %ini%u% paid-up capital as %ay $e deter%ined $y the :tate BankJ or bC carry on $usiness unless the aggregate !alue o" its paid-up capital and unencu%$ered general reser!es is o" such %ini%u% !alue within such period as %ay $e generally deter%ined $y the :tate Bank "ro% ti%e to ti%e+ su$Dect to a %a9i%u% o" ten per cent o" the total de%and and ti%e lia$ilities o" the $anking co%pany at any ti%e& 3@8No $anking co%pany incorporated outside Pakistan shall $e dee%ed to ha!e co%plied with the pro!isions o" su$-section 318 unless it deposits+ and keeps deposits+ with the :tate Bank an a%ount $y trans"er o" "unds "ro% outside Pakistan or in the "or% o" assets ac*uired out o" re%itta$le pro"its %ade $y it "ro% deposits in Pakistan which is not less than what is re*uired to $e %aintained under su$section 318+ in any one or %ore o" the "ollowing "or%s+ na%ely&N iC iiC iiiC ,nterest-"ree deposit in cash in Pakistan rupees ,nterest-"ree deposit in a "reely con!erti$le appro!ed "oreign e9change within the %eaning o" the :tate Bank o" Pakistan 4ct+ 15B6 3SSS,,, o" 15B68+ speci"ied $y the :tate Bank in respect o" such $anking co%panyJ and 'eposit o" un-encu%$ered appro!ed securities(
EB(lanationCD ,n this section and in sections @@ and @5+ Klia$ilitiesE shall not include the paid-up capital or the reser!es or any credit $alance in the pro"it and loss account o" the $anking co%pany or the a%ount o" any loan taken "ro% the :tate Bank or the a%ount recei!ed as loan in Pakistan currency $y the $anking co%pany "ro% the /ederal >o!ern%ent+ whether out o" a "oreign currency loan contracted $y the >o!ern%ent or otherwise+ or the a%ount o" "oreign currency loans o$tained $y the $anking co%pany directly "ro% any "oreign agency& 3?8<ithout preDudice to the pro!isions o" section C?+ the :ate Bank %ay+ $y order in writing+ re*uire any $anking co%pany which has "ailed to co%ply with the pro!isions o" clause 3$8 o" su$-section 318+ within the period deter%ined under that clause to deposit with the :tate Bank such a%ount on such ter%s and conditions as the :tate Bank %ay deter%ineJ and e!ery $anking co%pany which is so re*uired shall $e $ound to co%ply with the order Pro!ided that the a%ount o" the deposit so re*uired shall not e9ceed the a%ount $y which the aggregate o" the ti%e and de%and lia$ilities o" the $anking co%pany e9ceeds the a%ount o" such lia$ilities co%puted on the $asis o" Tthe aggregate !alue o" its paid-up capital and unencu%$ered general reser!esU X deter%ined under clause 3$8 o" su$-section 318(
53
Banking Laws and Practices-BNK 601 VU 4ny a%ount deposited and kept deposited with the :tate Bank under the pro!iso to su$-section 3?8 $y any $anking co%pany incorporated outside Pakistan shall+ in the e!ent o" the co%pany ceasing "or any reason to carry on $anking $usiness in Pakistan+ $e an asset o" the co%pany on which the clai%s o" all the creditors o" the co%pany in Pakistan shall $e a "irst charges( #he :tate Bank %ay+ i" it thinks "it+ e9tend the period re"erred to in su$-section 318or su$-section3?8 either generally or in any particular case( ," any dispute arises in co%puting the aggregate !alue o" the paid-up capital Tand unencu%$ered general reser!esU o" any $anking co%pany+ a deter%ination thereo" $y the :tate Bank shall $e "inal( /or the purposes o" this section+ 3a8 e9pression F!alueG %eans the real or e9changea$le !alue or+ i" the real or e9changea$le !alue e9ceeds the no%inal !alue+ the no%inal !alueJ and 3$8 the e9pression Kcapital and unencu%$ered general reser!esE %eans paid-up capital and such other ite%s as %ay $e noti"ied $y :tate Bank( M?N?MUM CA/?TA4 REQUREMENTS "OR &AN>S97"?s: as setout b# State &an$ o% /a$istan are given belo': Minimum /aid+u( Ca(ital 7eadline b# ')ic) to be increased a8 ;s ? $illion By ?1-1@-@006 $8 ;s 7 $illion By ?1-1@-@006 c8 ;s B $illion By ?1-1@-@00C d8 ;s 6 $illion By ?1-1@-@005 Regulation o% (aid+u( ca(ital subscribed ca(ital and aut)oriHed ca(ital and voting rig)ts o% s)are+ )olders: #hese regulations are contained in section 17 o" the =rdinanceJ these are !ery i%portant concepts and shall $e e9plained in detail( 1owe!er pro!isions or section 17 are reproduced $elow& < No $anking co%pany incorporated in Pakistan shall carry on $usiness in Pakistan unless it satis"ies the "ollowing conditions+ na%ely&i( that the su$scri$ed capital o" the co%pany is not less than one hal" o" the authori2ed capital and paid-up capital is not less than one hal" o" the su$scri$ed capital and that i" the capital is increased it co%plies with the conditions prescri$ed in this clause within such period not e9ceeding two years as the :tate Bank %ay allowJ ii( that the capital o" the co%pany consists o" ordinary shares onlyJ #hat+ su$Dect to the pro!isions contained in clause 3i!8+ the !oting rights o" any one shareholder are strictly proportionate to the contri$ution %ade $y hi% to the paid-up capital o" the co%panyJ iii( #hat the !oting rights o" any one shareholder+ e9cept those o" the /ederal >o!ern%ent or a Pro!incial >o!ern%ent do not e9ceed "i!e per cent o" the total !oting rights o" all the shareholders( !< Notwithstanding anything contained in any law "or the ti%e $eing in "orce or in any contract or instru%ent no suit or other proceeding shall $e %aintained against any person registered as the holder o" a share in a $anking co%pany on the ground that the title to the said share !ests in a person other than the registered holder& Pro!ided that nothing contained in this su$-section shall $ar a suit or other ProceedingN ;a< $y a trans"eree o" the share on the ground that he has o$tained "ro% the registered holder a trans"er o" the share in accordance with any law relating to such trans"erJ or 3$8 on $ehal" o" a %inor or a lunatic on the ground that the registered holder holds the share on $ehal" o" the %inor or lunatic( *< )!ery chair%an+ %anaging director or chie" e9ecuti!e o""icer $y whate!er na%e called o" a $anking co%pany shall "urnish to the :tate Bank through that $anking co%pany returns containing "ull particulars o" the e9tent and !alue o" his holding o" shares+ whether directly or indirectly+ in the $anking co%pany and o" any change in the e9tent o" such holding or any !ariation in the rights attaching thereto and such other in"or%ation relating to those shares as the :tate Bank %ay+ $y order+ re*uire and in such "or% and at such ti%e as %ay $e speci"ied in the order( 54 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU To understand t)e above 'e need to $no' t)e conce(t o% s)are o% a com(an#, di%%erent t#(e o% s)ares, and categories o% s)are ca(ital t)at is aut)oriHed ca(ital, issued ca(ital, unissued ca(ital, subscribed ca(ital and (aid u( ca(italC Meaning o% S)are 4 share in a co%pany is one o" the units into which the total capital o" the co%pany is di!ided( #hus share %eans a share in the capital o" a co%pany a share is a proportion o" capital which each shareholder is entitled to( 4 share is not a su% o" %oney+ $ut an interest %easured $y a su% o" %oney and %ade up o" !arious rights and lia$ilities o" the shareholders( 4 share in!ol!es rights and lia$ilities( ,n si%ple words+ a share indicates the pecuniary interest o" the shareholders and their rights and lia$ilities( #here"ore+ in this sense a share %ay $e de"ined as an e9isting $undle o" rights and lia$ilities( 4 share is an a$stract right to participate in pro"its and in the capital and assets o" a co%pany( :hares are dee%ed to $e situated at a place at which the rights o" %e%$ers are kept+ and where the shares can $e dealt with( >inds o% S)ares Allo'ed Under 4a': 4 co%pany li%ited $y shares %ay ha!e di""erent kinds o" shares and classes therein as pro!ided $y its %e%orandu% and articles( #he shares which a co%pany can issue are o" "ollowing types C =rdinary or e*uity shares !C Pre"erence shares *C 'e"erred shares Ordinar# or E:uit# s)ares: #he e*uity shares are those which are not pre"erential shares+ i(e( these shares do not enDoy any pre"erential rights( #hus+ "or the purpose o" di!idend and repay%ent o" capital+ the e*uity shares rank a"ter the pre"erence shares( >enerally+ their rate o" di!idend is not "i9ed( ,t %ay !ary "ro% year to year depending upon the pro"its o" the co%pany+ they %ay get higher di!idend i" the pro"its are huge+ and %ay get nothing i" there are no pro"its( #he rate o" di!idend is deter%ined $y the directors o" the co%pany+ the su% total o" e*uity shares is the e*uity share capital( /re%erence S)ares #he pre"erence shares are those which ha!e so%e pre"erential rights o!er the other types o" shares i(e(+ which enDoy so%e priority o!er the e*uity shares( 4 share to $e pre"erence share+ %ust ha!e $oth the "ollowing pre"erential rights& C A (re%erential rig)t as to t)e (a#ment o% dividend: during the continuance o" the co%pany+ the pre"erence shareholders %ust get so%e di!idend C #he pre"erence di!idend %ay consist o" "i9ed a%ount to $e distri$uted a%ong the pre"erence shareholders+ or it %ay $e paid at a "i9ed rate e(g( B Y o" no%inal !alue o" shares( !C A (re%erential rig)t as to t)e re(a#ment o% ca(ital / in the e!ent o" winding up o" the co%pany+ the a%ount paid on pre"erence shares %ust $e paid $ack $e"ore anything is paid to the e*uity shareholders( #he su%-total o" the pre"erence shares is the Fpre"erence share capital o" the co%pany( Kinds o" Pre"erence :hares& #he pre"erence shares %ay $e o" the "ollowing classes& C Cu%ulati!e and non-cu%ulati!e pre"erence shares !C Participating and non-participating pre"erence shares *C Con!erti$le and non-con!erti$le pre"erence shares 1C ;edee%a$le pre"erence shares( 7e%erred S)ares 'e"erred shares are also called /ounders :hares or -anage%ent :hares( #hese shares are usually issued to the pro%oters+ !endor or their no%inees+ and are generally "or the purpose o" indicating the pro%oterEs "aith in the propositions( #hese shares are generally used to re%unerate the pro%oters or Copyright Virtual ni!ersity o" Pakistan 55
Banking Laws and Practices-BNK 601 VU "ounders o" the co%pany or the underwriters o" the share capital( #hese are always "ew in nu%$ers( #he holders o" these shares usually recei!e no di!idends until the di!idends on all other classes o" shares are paid in "ull+ or there has $een paid in each year a stated di!ided on the capital paid up on all the other issued shares( #here is usually no li%it placed on the rate o" di!ided that %ay $e paya$le to de"erred shareholders+ $ut it would $e necessary to place so%e restriction on the a%ount o" di!idend paya$le to the ordinary shareholders where de"erred shares ha!e $een issued( <hen surplus pro"its are large these shares $eco%e !ery !alua$le( #his type o" shares %ay $e de"erred as to a clai% o" capital in a winding up+ in addition to or in lieu o" its $eing de"erred as to di!idends( Categories o% S)are Ca(ital #he ter% share capital used in connection with the capital o" a li%ited co%pany is used in se!eral senses( :o the capital o" a co%pany %ay $e categori2ed as "ollows& a( 4uthori2ed capital $( ,ssued capital c( nissued capital d( :u$scri$ed capital e( Paid-up capital Aut)oriHed Ca(ital ,t is also called no%inal capital+ or registered capital( 4uthori2ed capital is the %a9i%u% a%ount o" share capital which a co%pany sets out in the %e%orandu% o" association and which it has power to issue( ,t is the a%ount o" capital with which a co%pany proposes to $e registered+ the authori2ed capital depends upon the $usiness re*uire%ents o" each co%pany+ there is no legal restriction upon the %a9i%u% li%it o" authori2ed capital( #he a%ount o" authori2ed capital stated in the %e%orandu% %ay $e increased $y the co%pany( 4 co%pany is not o$liged to issue whole o" its authori2ed capital at once( ,t %ay issue the whole or any part o" authori2ed capital and keep the $alance "or "uture re*uire%ents( <hen the authori2ed capital is increased the e9tent o" the increase is not li%ited to the re*uire%ents o" the co%pany at the ti%e+ $ut also co!ers pro$a$le re*uire%ents in the "uture( ?ssued ca(ital: is that part o" the authori2ed capital which is actually o""ered 3issued8 to prospecti!e share holders "or su$scription( ,t represents the a%ount which is a!aila$le "or su$scription( /urther issue is %ade as and when the need arises( #hus the e9pression Fissued capitalG is used "or the total nu%$er o" shares allotted $y the co%pany "or the ti%e $eing( Unissued ca(ital: the part o" the authori2ed capital which is not issued+ at any gi!en ti%e+ is called unissued capital( Subscribed Ca(ital: #he whole o" the issued capital %ay not $e taken up $y the prospecti!e shareholders( :u$scri$ed capital is that part o" the issued capital which is actually su$scri$ed 3taken up8 $y the pu$lic /aid+u( Ca(ital Paid-up capital is that part o" the issued capital which has $een paid-up $y the shareholders( Paid up capital is always e*ual to su$scri$ed capital( Election o% ne' directors: Sec 0 < #he :tate Bank %ay+ $y order+ re*uire any $anking co%pany to call a general %eeting o" the shareholders o" the co%pany within such ti%e+ not less than two %onths "ro% the date o" the order+ as %ay $e speci"ied therein or within such "urther ti%e as the :tate Bank %ay allow in this $ehal"+ to elect in accordance with the !oting rights per%issi$le under this =rdinance "resh directors+ and the $anking co%pany shall $e $ound to co%ply with the order( 56 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU !< )!ery director elected under su$-section 318 shall hold o""ice until the date up to which his predecessor would ha!e held o""ice+ i" the election had not $een held( *< 4ny election duly held under this section shall not $e called in *uestion in any court( A((ointment o% director b# t)e State &an$: Sec 0+A Notwithstanding anything contained in the Co%panies 4ct+ 151? 3V,, o" 151?8+ or in the %e%orandu% or articles o" association o" any $anking co%pany+ the :tate Bank %ay appoint not %ore than one person to $e a director o" a $anking co%pany+ whether or not he holds any *uali"ication shares( Restriction on term o% o%%ice o% directors: Sec 0+& < 4 director o" a $anking co%pany+ not $eing its chie" e9ecuti!e+ $y whate!er na%e called+ or a director no%inated under section 1B4+ shall not hold o""ice "or %ore than si9 consecuti!e years( )9planation(Nin co%puting the period o" si9 consecuti!e years "or the purpose o" this su$-section+ any $reak o" less than three years in the continuity o" o""ice shall $e disregarded( !< 4 director o" a $anking co%pany !acating o""ice in pursuance o" su$-section 318 shall not $e eligi$le "or re-election as a director o" that $anking co%pany unless a period o" three years has elapsed since the date on which he so !acated his o""ice& Pro!ided that a director who has to so !acate his o""ice %ay continue in his o""ice "or a period o" not %ore than si9 %onths "ro% the co%%ence%ent o" the Banking Co%panies 34%end%ent8 4ct+ 156@+ or until a new director is elected or co-opted in his place whiche!er is earlier( 2e s)all continue 'it) section 0 and rest o% t)e (rovisions o% t)e Ordinance in t)e coming 4essonsC
57
Banking Laws and Practices-BNK 601 &AN>?NG COM/AN?ES OR7?NANCE, -.! 2e s)all cover t)e %ollo'ing as(ects9 statutor# (rovisions: o o o o o o o o o o
VU LESSON 12
Vacation o" =""ice( ;estriction on co%%ission+ $rokerage discount+ etc(+ on sale o" shares( Prohi$ition o" charge on un-paid capital( Prohi$ition o" "loating charge on assets( ;estrictions as to pay%ent o" di!idend( Prohi$ition o" co%%on directors( ;eser!e /und( Cash ;eser!e( ;estriction on the nature o" su$sidiary co%panies( ;estrictions on loans and ad!ances( Power o" :tate Bank to control ad!ances $y $anking co%panies(
Vacation o% O%%ice o% a 7irector o% &an$ing Com(an#: Sec 0+C 4 director o" a $anking co%pany shall !acate his o""ice i" in relation to the $anking co%pany he has "ailed to pay any ad!ance or loan or any install%ent thereo" or interest thereon or any a%ount due on any guarantee+ or to do or per"or% any act agreed to or undertaken in writing to $e done or per"or%ed $y hi%+ and such "ailure continues "or a period o" one %onth a"ter notice in writing has $een ser!ed on hi% $y the $anking co%pany calling upon hi% to %ake the pay%ent or to do or per"or% the act( Restriction on commission, bro$erage, discount, etcC on sale o% s)ares: Sec . Notwithstanding anything to the contrary in sections 10B and 10B4 o" the Co%panies 4ct+ 151? + no $anking co%pany shall pay out directly or indirectly $y way o" co%%ission+ $rokerage+ discount or re%uneration in any "or% in respect o" any shares issued $y it+ any a%ount e9ceeding in the aggregate two and one-hal" per cent o" the paid-up !alue o" the said shares( /ro)ibition o% c)arge on un(aid ca(ital: Sec 5 No $anking co%pany shall create any charge upon any unpaid capital o" the co%pany and such charge+ i" created+ shall $e in!alid( /ro)ibition o% %loating c)arge on assets: Sec 6 Notwithstanding anything contained in section 6 no $anking co%pany shall create a "loating charge on the undertaking or any property o" the co%pany or any part thereo"+ unless the creation o" such "loating charge is certi"ied in writing $y the :tate Bank as not $eing detri%ental to the interest o" the depositors o" such co%pany( 4ny such charge created without o$taining the certi"icate o" the :tate Bank shall $e in!alid( 4ny $anking co%pany aggrie!ed $y the re"usal o" a certi"icate under su$section 318 %ay+ within ninety days "ro% the date on which such re"usal is co%%unicated to it+ appeal to the /ederal >o!ern%ent( #he decision o" the >o!ern%ent where an appeal has $een pre"erred to it under su$-section 3?8 or o" the :tate Bank where no such appeal has $een pre"erred shall $e "inal( No $anking co%pany shall pay any di!idend on its shares until all its capitali2ed e9pense 3including preli%inary e9penses+ organi2ation e9penses+ share-selling co%%ission+ $rokerage+ a%ounts o" losses incurred and any other ite% o" e9penditure not represented $y tangi$le assets8 ha!e $een co%pletely written o""( C)arge and %loating c)arge are ver# im(ortant conce(ts ')ic) are eB(lained in t)e %ollo'ing (aragra()s: C)arge: 4ccording to trans"er o" property 4ct+ charge has $een de"ined as under& 58 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU Fwhere i%%o!a$le property o" one person is $y act o" parties+ or operation o" law+ %ade securities "or pay%ent o" %oney how another+ and transaction does not a%ount to a %ortgage+ the latter person is said to ha!e a charge on the propertyJ and all the pro!isions here in $e"ore contained which apply to a si%ple %ortgage shall+ so "ar as %ay $e+ apply to such charge( #he concept o" %ortgage and si%ple %ortgage 3registered %ortgage8 is e9plained $elow& ;Mortgage<: 4 %ortgage is the trans"er o" an interest in speci"ic i%%o!ea$le property "or the purpose o" securing the pay%ent o" %oney ad!anced or to $e ad!anced $y way o" loan+ an e9isting or "uture de$t+ or the per"or%ance o" an engage%ent which %ay gi!e rise to a pecuniary lia$ility( ;Registered or 4egal Mortgage<: #his is created through a "or%al docu%ent called %ortgage deed( -ortgage deed is registered with the ;egistrar o" titles( ,t is co%parati!ely e9pensi!e as it in!ol!es sta%p duty and registration "ee( C)arge as de"ined a$o!e is a right o" pay%ent out o" a speci"ied property( #he charge can $e created $y an agree%ent $etween the parties or $y operation o" law( ,t is+ worth %entioning that no dou$t a property is o""ered as a security "or "ul"ill%ent o" an o$ligation $ut this transaction cannot $e ter%ed as %ortgage( 4ccording to Lord 4tkinson+ the charge is e9plained in the "ollowing words F , think there can $e no dou$t that where in a transaction "or !alue $oth parties e!ince an intention that property+ e9isting or "uture+ shall $e %ade a!aila$le as securities "or the pay%ent o" a de$t and that the creditors shall ha!e a present right to ha!e it %ade a!aila$le+ there is a charge+ e!en though the present legal right which is conte%plated can only $e en"orced at so%e "uture dateJ and though the creditor gets no legal right o" property+ either a$solute or special+ or any legal right to possession+ $ut only gets the right to ha!e the security a!aila$le $y an order o" the court( ," on the other hand+ the parties do not intend that there should $e a present right to ha!e the security %ade a!aila$le+ $ut only that there should $e a right in "uture+ $y agree%ent such as a license to sei2e goods( #here will $e no chargeG Registration o% a C)arge: #hough no interest in i%%o!a$le property is trans"erred under a charge+ the docu%ent creating a charge would purport to declare a right to i%%o!a$le propertyJ and its registration should $e %ade under :ection 16 31-$8 o" the ;egistration 4ct( /or the en"orce%ent o" a charge+ reasona$le notice %ust $e ser!ing on the counter party( "loating C)arge 4 %ortgage+ de$enture or other security docu%entation+ is likely to create charges o!er particular assets as security "or $orrowings or other inde$tedness( #here are essentially two types o" charge+ "loating and "i9ed( 4 "loating charge is appropriate to assets and %aterial which is su$Dect to change on a day to day $asis+ such as stock( ,ndi!idual ite%s %o!e into and out o" the charge as they are $ought and sold in the ordinary course o" e!ents( #he "loating charge crystalli2es i" there is a de"ault or si%ilar e!ent( 4t that stage the "loating charge is con!erted to a "i9ed charge o!er the assets which it co!ers at that ti%e( 4 "loating charge is not as e""ecti!e as a "i9ed charge $ut is %ore "le9i$le( /or the $anking co%panies+ it is ad!isa$le that while accepting properties as collaterals to %ake arrange%ents to search the prior charges on the said properties( 4 search should $e %ade in the o""ice o" the Collector and :u$-;egistrar or the 'istrict ;egistrar to ensure that there e9ists no prior charge on the property+ $ecause any trans"er o" interest in an i%%o!a$le property+ is su$Dect to all pre!ious %ortgages and charges which had $een registered( #he search "or possession should pertain to at least pre!ious @0 years( ," the title deeds o" the property are in the na%e o" %ore than one person+ the search should $e directed against the na%e o" each person through who% the title is %ade( <hen the $anker is satis"ied as to his $orrowerEs title+ he should decide a$out the e9ecution o" %ortgage( ,n case o" a registered %ortgage+ the deed should $e properly dra"ted+ pre"era$ly with the help o" a lawyer( #he "inali2ed %ortgage deed should $e signed $y the $orrower who now $eco%es the %ortgagor+ and should $e witnessed $y two independent personJ and the deed should $e properly sta%ped and registered( ,n case o" an e*uita$le %ortgage+ a proper -e%orandu% o" 'eposit o" title deeds should $e dra"ted and signed $y the $orrower in the presence o" two witnesses( 4s a %atter o" precaution the $anker should see that the $orrower has insured the property against "ire( ,n addition+ the Copyright Virtual ni!ersity o" Pakistan 59
Banking Laws and Practices-BNK 601 VU $anker should o$tain the last pre%iu% receipt and see whether it is paid up to date( Bankers should register the assign%ent with the insurance co%panyJ and when the policy is renewed+ it %ay $e in the $ankerEs na%e( #he $anker should see that the title deeds deposited as security are the original title deeds o" the property( ," the title deeds relate to the site on which the $uilding is to $e erected+ the $anker should take the written agree%ent to %ortgage the property a"ter its construction( Restrictions as to (a#ment o% dividend: sec Notwithstanding anything to the contrary contained in su$-section 318 or in the Co%panies 4ct+ 151? 3V,, o" 151?8+ a $anking co%pany %ay pay di!idends on its shares without writing o""N the depreciation+ i" any+ in the !alue o" its in!est%ent in appro!ed securities in any case where such depreciation has not actually $een capitali2ed or otherwise accounted "or as a lossJ #he depreciation+ i" any+ in the !alue o" its in!est%ents in shares+ de$entures or $onds 3others than appro!ed securities8 in any case where ade*uate pro!ision "or such depreciation has $een %ade to the satis"action o" the auditor o" the $anking co%panyJ the $ad de$ts+ i" any+ in any case where ade*uate pro!ision "or such de$ts had $een %ade to the satis"action o" the auditor o" the $anking co%pany( ?n section -, it )as been (rovided t)at dividend can be (aid i% ade:uate (rovisions on account o% de(reciation and bad debts )ave been made b# t)e ban$ing com(an# to t)e satis%action o% t)e auditorsC T)e conce(t o% dividend is ver# im(ortant and )as been eB(lained in t)e %ollo'ing (aragra(): #he ter% di!idend has not $een de"ined in the Co%panies =rdinance( ,t is used in two di""erent senses !i2( while a co%pany is a going concern earning pro"it and distri$uting the sa%e( #he ter% di!idend when used in connection with the winding up o" a co%pany %eans the di!ision o" co%panyEs assets a%ong the contri$utors 3i-e( %e%$ers at the ti%e o" winding up8 and co%paniesE creditors( 'i!idend in the sense o" share o" pro"it %eans a distri$ution to the %e%$ers o" a co%pany and represents a return on capital in!ested $y the %e%$ers as a reward "or the risk o" such in!est%ent( :o a di!idend %ay $e de"ined as K that portion o" the pro"its o" the co%pany that "alls to the share o" each indi!idual shareholders o" the co%pany+ in other words+ di!idend is the return on the shares that each shareholder gets "ro% the co%pany out i" its pro"its( #hus it is that portion o" the co%panyEs pro"its which is distri$uted a%ong the eligi$le shareholders o" the co%pany( :o to say+ a di!idend %eans that portion o" accu%ulated pro"it o" the co%pany which is di!ided a%ongst the %e%$ers in proportion to the nu%$er o" shares held $y each( Rules Regarding 7ivided: Both the Board o" 'irectors and the shareholders know that the in!entors %ust $e gi!en so%e incenti!e in the "or% o" share o" pro"its earned $y the co%pany( )!ery co%pany+ a"ter the deter%ination o" trading results intends to distri$ute so%e portion o" pro"it as di!idend( #he directors power to reco%%end and %e%$ers power to declare di!idend need not e9pressly $e gi!en $y the %e%orandu% or articles o" association o" the co%pany( #he co%pany has an i%plied power to pay di!idends i" there are distri$uta$le pro"its( #he %anner o" paying %ay+ howe!er+ $y regulated $y inclusion o" necessary pro!isions in the articles o" association( /ro)ibition o% common directors: these are contained in section@0 which is gi!en hereunder& C )9cept with the per%ission o" the :tate Bank+ no $anking co%pany incorporated in Pakistan shall ha!e as a director any person who is a directorN iC =" any other $anking co%panyJ or iiC =" co%panies which a%ong the%sel!es are entitled to e9ercise !oting rights in e9cess o" twenty per cent o" the total !oting rights o" all the shareholders o" the $anking co%pany( 3,48 No $anking co%pany incorporated in Pakistan shall ha!e as a director any person who isN 60 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU aC 4 /ederal -inister+ a -inister o" :tate or a Pro!incial -inisterJ or bC 4 person in the ser!ice o" Pakistan who is not appointed or no%inated $y >o!ern%ent as a director $y !irtue o" his o""ice( !C ," i%%ediately $e"ore the co%%ence%ent o" this =rdinance any person holding o""ice as a director o" a $anking co%pany is also a director o" co%panies which a%ong the%sel!es are entitled to e9ercise !oting rights in e9cess o" twenty per cent o" the total !oting rights o" all the shareholders o" the $anking co%pany he shall+ within such period "ro% such co%%ence%ent as the :tate Bank %ay speci"y in this $ehal"N iC )ither resign his o""ice as a director o" the $anking co%panyJ or iiC Choose such nu%$er o" co%panies as a%ong the%sel!es are not entitled to e9ercise !oting rights in e9cess o" twenty per cent o" the total !oting rights o" all the shareholder o" the $anking co%panies as co%panies in which he wishes to continue to hold the o""ice o" a director and resign his o""ice as a director in the other co%panies( Reserve "und: Sec ! )!ery $anking co%pany incorporated in Pakistan shall create a reser!e "und to which shall $e credited N i" the a%ount in such "und together with the a%ount in the share pre%iu% account is less than the paidup capital o" the $anking co%pany+ a su% e*ui!alent to not less than twenty percent o" the $alance o" pro"it o" each year as disclosed in the pro"it and loss account prepared under section ?7 and $e"ore any di!idend is declaredJ and ," the a%ount in such "und together with the a%ount in the share pre%iu% account is e*ual to or e9ceeds the paid-up capital o" the $anking co%pany+ a su% e*ui!alent to not less than ten per cent o" the $alance o" pro"it disclosed as a"oresaid and $e"ore any di!idend is declared <here a $anking co%pany appropriates any su% or su%s "ro% the reser!e "und or the share pre%iu% account+ it shall+ within twenty-one days "ro% the date o" such appropriation+ report the "act to the :tate Bank e9plaining the circu%stances relating to such appropriation& Pro!ided that the :tate Bank %ay+ in any particular case+ e9tend the said period o" twenty-one days $y such period as it thinks "it or condone any delay in the %aking o" such report( Cas) Reserve: Sec !! )!ery $anking co%pany+ not $eing a schedule $ank+ shall %aintain $y way o" cash reser!e in cash with itsel"+ or in current account opened with the :tate Bank or its agent or partly in cash with itsel" and partly in such account or accounts a su% e*ui!alent to at least two per cent o" its ti%e lia$ilities in Pakistan and "i!e per cent o" its de%and lia$ilities in Pakistan and shall su$%it to the :tate Bank $e"ore the "i"teenth day o" e!ery %onth a return showing the a%ount so held on #hursday o" each week o" the preceding %onth with particulars o" its ti%e and de%and lia$ilities in Pakistan on each such #hursdayV or i" any such #hursday is a pu$lic holiday under the Negotia$le ,nstru%ents 4ct+ 1CC1 3SSV, o" 1CC18+ at the close o" $usiness on the preceding working day( Restriction on t)e nature o% subsidiar# com(anies: Sec !* 4 $anking co%pany shall not "or% any su$sidiary co%pany e9cept a su$sidiary co%pany "or%ed "or one or %ore o" the "ollowing purposes+ na%ely&N the undertaking and e9ecuting o" trusts+ ;aa< the carrying on o" $anking $usiness strictly in con"or%ity with the ,nDunctions o" ,sla% as laid down in the 1oly Quran and :unnahJEE the undertaking o" the ad%inistration o" estates as e9ecutor+ trustee or otherwise+ ;bb< the carrying on o" $usiness o" %odara$a under the pro!isions o" the -odara$a Co%panies and -odara$a 3/loatation and Control8 =rdinance 15C0 the pro!iding o" sa"e deposit !aults+ with the pre!ious per%ission in writing o" the :tate Bank+ the carrying on o" the $usiness o" $anking e9clusi!ely outside PakistanJ ;dd< the conduct o" any "ro% o" $usiness per%itted $y section 6J or ;e< :uch other purposes as are incidental to the $usiness o" $anking( :a!e as pro!ided in su$-section 318+ no $anking co%pany shall hold shares in any co%pany whether as pledgee+ %ortgagee or a$solute owner+ o" an a%ount e9ceeding thirty per cent o" the paid-up share Copyright Virtual ni!ersity o" Pakistan 61
Banking Laws and Practices-BNK 601 VU capital o" that co%pany or thirty per cent o" its own paid-up share capital and reser!es+ whiche!er is less& Pro!ided that any $anking co%pany which is on the date o" co%%ence%ent o" this =rdinance holding any shares in contra!ention o" the pro!isions o" this su$-section shall not $e lia$le to any penalty there"ore i" it reports the %atter without delay+ to the :tate Bank and i" it $rings its holding o" shares into con"or%ity with the said pro!ision within such period+ not e9ceeding two years Restrictions on loans and advances: ;Sec !1< No $anking co%pany shallN %ake any loans or ad!ances against the security o" its own sharesJ or grant unsecured loans or ad!ances to+ or %ake loans and ad!ances on the guarantee o" (N any o" its directorsJ 3ii8 any o" the "a%ily %e%$ers o" any o" its directorsJ any "ir% or pri!ate co%pany in which the $anking co%pany or any o" the persons re"erred to in su$-clause 3i8 or su$-clause 3ii8 is interested as director+ proprietor or partnerJ or any pu$lic li%ited co%pany in which the $anking co%pany or any o" the persons as a"oresaid is su$stantially interested( No $anking co%pany shall %ake loans or ad!ances to any o" its directors or to indi!iduals+ "ir%s or co%panies in which it or any o" its directors is interested as partner+ director or guarantor+ as the case %ay $e+ without the appro!al o" the %aDority o" the directors o" that $anking co%pany+ e9cluding the director concerned( /o'er o% State &an$ to control advances b# ban$ing com(anies: Sec !0 <hene!er the :tate Bank is satis"ied that it is necessary or e9pedient in the pu$lic interest so to do+ it %ay deter%ine the policy in relation to ad!ances to $e "ollowed $y $anking co%panies generally or $y any $anking co%pany in particular+ and+ when the policy has $een so deter%ined+ all $anking co%panies or the $anking co%pany concerned+ as the case %ay $e+ shall $e $ound to "ollow the policy as so deter%ined( ;!<<ithout preDudice to the generality o" the power con"erred $y su$-section 318+ the :tate Bank %ay gi!e directions to $anking co%panies either generally or to any $anking co%pany or group o" $anking co%panies in particular(Nas to the credit ceilings to $e %aintained+ credit targets to $e achie!ed "or di""erent purposes+ sectors and regions+ the purposes "or which ad!ances %ay or %ay not $e %ade+ the %argins to $e %aintained in respect o" ad!ances+ the rates o" interest+ charges or %ark-up to $e applied on ad!ances and the %a9i%u% or %ini%u% pro"it sharing ratios( 2e s)all continue 'it) t)e (o'ers vested in State &an$ under various (rovisions o% t)e &an$ing Com(anies Ordinance, -.!C
62
Banking Laws and Practices-BNK 601 &AN>?NG COM/AN?ES OR7?NANCE, -.! 2e s)all cover t)e %ollo'ing as(ects o% t)is Ordinance: o o o o o o o o o o o o o
VU LESSON 13
Power o" :tate Bank to control ad!ances $y $anking co%panies( Power o" :tate Bank to collect and "urnish credit in"or%ation( Preparation o" special reports( ;eco!ery o" certain dues o" $anking co%panies as arrears o" land re!enue( Power o" /ederal >o!ern%ent prohi$it acceptance o" deposits $y $anking co%panies incorporated outside Pakistan( 'eposits( Licensing o" $anking co%panies( Prohi$ition o" ad!ertising "or deposits and collection( 'isrupti!e union acti!ities( ;estrictions on opening o" new and trans"er o" e9isting place o" $usiness( -aintenance o" li*uid assets( 4ssets in Pakistan( nclai%ed deposits and articles o" !alue(
/o'er o% State &an$ to control advances b# ban$ing com(anies: Sec !0 C <hene!er the :tate Bank is satis"ied that it is necessary or e9pedient in the pu$lic interest so to do+ it %ay deter%ine the policy in relation to ad!ances to $e "ollowed $y $anking co%panies generally or $y any $anking co%pany in particular+ and+ when the policy has $een so deter%ined+ all $anking co%panies or the $anking co%pany concerned+ as the case %ay $e+ shall $e $ound to "ollow the policy as so deter%ined( !C <ithout preDudice to the generality o" the power con"erred $y su$-section 318+ the :tate Bank %ay gi!e directions to $anking co%panies either generally or to any $anking co%pany or group o" $anking co%panies in particular(N as to the credit ceilings to $e %aintained+ credit targets to $e achie!ed "or di""erent purposes+ sectors and regions+ the purposes "or which ad!ances %ay or %ay not $e %ade+ the %argins to $e %aintained in respect o" ad!ances+ the rates o" interest+ charges or %ark-up to $e applied on ad!ances and the %a9i%u% or %ini%u% pro"it sharing ratiosJ and prohi$iting the gi!ing o" loans+ ad!ances and credit to any $orrower or group o" $orrowers on the $asis o" interest+ either "or a speci"ic purpose or "or any purpose whatsoe!erJ and each $anking co%pany shall $e $ound to co%ply with any direction so gi!en( *C ," any de"ault is %ade $y a $anking co%pany in co%plying with the policy deter%ined under su$section 318 or direction gi!en under su$ section 3@8+ e!ery director and other o""icer o" the $anking co%pany and e!ery other person who is knowingly a party to such de"ault shall+ $y order o" the :tate Bank+ $e lia$le to a penalty o" an a%ount which %ay e9tend to twenty thousand rupees and+ where the de"ault is a continuing one+ o" a "urther a%ount which %ay e9tend to one thousand rupees "or e!ery day a"ter the "irst during which the de"ault continues( 1C <ithout preDudice to the pro!isions o" su$-section 3?8+ the :tate Bank %ay+ "or the purposes o" securing i%ple%entation o" any special credit sche%es or %onetary policy or o$ser!ance o" credit ceilings $y a $anking co%pany+ $y order in writing re*uire $anking co%panies generally+ or any $anking co%pany in particular+ to %ake special deposits with it "or such a%ount and on such ter%s and conditions as %ay $e laid down $y the :tate Bank in this $ehal"( 0C #he a%ount deposited with the :tate Bank under su$-section 378 or any part thereo" %ay+ at the discretion o" the :tate Bank+ $e released $y it to the $anking co%pany which deposited it as and when Copyright Virtual ni!ersity o" Pakistan 63
Banking Laws and Practices-BNK 601 VU the :tate Bank dee%s "it either unconditionally or on such ter%s and su$Dect to such conditions as the :tate Bank %ay+ $y order in writing+ deter%ine "ro% ti%e to ti%e( .C 4ny penalty i%posed under su$-section 3?8 shall $e paya$le on de%and %ade $y the :tate Bank and+ in the e!ent o" re"usal or "ailure $y the director+ o""icer or other person concerned to pay on such de%and+ shall $e reco!era$le as arrear o" land re!enue( /o'er o% t)e State &an$ to collect and %urnis) credit in%ormation: Sec !0+A C )!ery $anking co%pany shall "urnish to the :tate Bank credit in"or%ation in such %anner as the :tate Bank %ay speci"y+ and the :tate Bank %ay+ either o" its own %otion or at the re*uest o" any $anking co%pany+ %ake such in"or%ation a!aila$le to any $anking co%pany on pay%ent+ o" such "ee as the :tate Bank %ay "i9 "ro% ti%e to ti%e& Pro!ided that+ while %aking such in"or%ation a!aila$le to a $anking co%pany+ the :tate Bank shall not disclose the na%es o" the $anking co%panies which supplied such in"or%ation to the :tate Bank& Pro!ided "urther that+ a $anking co%pany which proposes to enter into any "inancial arrange%ent which is in e9cess o" the li%it laid down in this $ehal" $y the :tate Bank "ro% ti%e to ti%e shall+ $e"ore entering into such "inancial arrange%ent+ o$tain credit in"or%ation on the $orrower "ro% the :tate Bank( !C 4ny credit in"or%ation "urnished $y the :tate Bank to a $anking co%pany under su$-section 318 shall $e treated as con"idential and shall not+ e9cept "or the purposes o" this section or with the prior per%ission o" the :tate Bank+ $e pu$lished or otherwise disclosed( No court+ tri$unal or other authority+ including an o""icer o" >o!ern%ent shall re*uire the :tate Bank or any $anking co%pany to disclose any in"or%ation "urnished to+ or supplied $y+ the :tate Bank under this section( EB(lanationCD/or the purpose o" this section+ iC FBorrowerG %eans any person to who% any credit li%it has $een sanctioned $y any $anking co%pany+ whether a!ailed o" or not+ and includesNin the case o" a co%pany or corporation+ its su$sidiariesJ iiC iiiC ivC ,n the case o" a 1indu undi!ided "a%ily+ any %e%$er thereo" or any "ir% in which such %e%$er is a partnerJ ,n the case o" a "ir%+ any partner thereo" or any other "ir% in which such partner is a partnerJ and ,n the case o" an indi!idual+ any "ir% in which such indi!idual is a partnerJ and
LCredit in%ormationP %eans any in"or%ation relating toN iC iiC iiiC ivC #he a%ounts and the nature o" loans or ad!ances or other credit "acilities+ including $ills purchased or discounted+ letters o" credit and guarantees+ inde%nities and other engage%ents e9tended $y a $anking co%pany to any $orrower or class o" $orrowersJ #he nature o" security taken "ro% any $orrower "or credit "acilities granted to hi%J #he guarantees+ inde%nities or other engage%ents "urnished to a $anking co%pany $y any o" its custo%ersJ and =perations or accounts in respect o" loans+ ad!ances and other credit "acilities re"erred to in this clause(
#he :tate Bank shall prepare+ and su$%it to the /ederal >o!ern%ent+ a special report e!ery year on cases o" write o"" o" loans+ %ark-up and other dues+ or "inancial relie" through rescheduling and restructuring o" loans and su$sidi2ed loans pro!ided $y the $anking co%panies+ in which esta$lished $anking practices or authori2ed procedures ha!e $een departed "ro% with a !iew to causing wrong"ul loss to the $ank or con"erring wrong"ul loss to the $ank or con"erred wrong"ul gain on any constituent( ," the %atters raised in the report relate to pu$lic interest+ the /ederal >o!ern%ent %ay su$%it the 64 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU report+ or such part o" it as relates to pu$lic interest+ to Parlia%ent or to the :tanding Co%%ittee o" a 1ouse o" Parlia%ent dealing with /inance Recover# o% certain dues o% ban$ing com(anies as arrears o% land revenue: Sec !0 & Loans and ad!ances %ade $y a $anking co%pany "or agricultural and other purposes Fand any other a%ounts decreed $y any court in "a!or o" a $anking co%pany or a "inancial institution speci"ied in Fsection ?4G shall $e reco!era$le as an arrear o" land re!enue as i" the $anking co%pany were a local authority "or the purposes o" :ection B o" the Revenue Recover# Act, -68 Pro!ided that no su% shall $e so reco!era$le unless the $anking co%pany has+ $y notice in writing+ in"or%ed the de$tor+ not less than "i"teen days $e"ore proceeding to ha!e it so reco!ered+ that he %ay repay $y such install%ent as %ay $e "i9ed in the notice and that action to ha!e the de$t reco!ered as an arrear o" land re!enue will $e taken i" he "ails to pay any install%ent on or $e"ore the due date /o'er o% State &an$ to (ro)ibit acce(tance o% de(osits b# ban$ing com(anies incor(orated outside /a$istan: Sec !. #he :tate Bank %ay+ $y noti"ication in the =""icial >a2ette+ order that any $anking co%pany or any class o" $anking co%panies incorporated outside Pakistan shall "ro% a date to $e speci"ied in the noti"ication& discontinue to accept any deposits or accept deposits only upon such ter%s and under such conditions as %ay $e speci"ied in the noti"ication& Pro!ided that no such noti"ication shall $e %ade earlier than three years a"ter the co%%ence%ent o" this =rdinance and the date speci"ied in the noti"ication shall not $e earlier than one year "ro% the date o" the noti"ication( 4icensing o% ban$ing com(anies: Sec !5 No indi!idual or association or $ody o" indi!iduals+ not $eing a co%pany+ shall carry on $anking $usiness in Pakistan and+ sa!e as hereina"ter pro!ided+ no co%pany shall carry on $anking $usiness in Pakistan unless it holds a license issued in that $ehal" $y the :tate BankJ and any such license %ay $e issued su$Dect to such conditions as the :tate Bank %ay think "it to i%pose( )!ery $anking co%pany in e9istence on the co%%ence%ent o" this =rdinance+ $e"ore the e9piry o" si9 %onths "ro% such co%%ence%ent+ and e!ery other co%pany $e"ore co%%encing $anking $usiness in Pakistan+ shall apply in writing to the :tate Bank "or a license under this section& Pro!ided that nothing in su$-section 318 shall $e dee%ed to prohi$it a $anking co%pany in e9istence on the co%%ence%ent o" this =rdinance "ro% carrying on $anking $usiness until it is granted a license in pursuance o" this section or is $y notice in writing in"or%ed $y the :tate Bank that a license cannot $e granted to it& Pro!ided "urther that the :tate Bank shall not gi!e a notice as a"oresaid to a $anking co%pany in e9istence on the co%%ence%ent o" this =rdinance $e"ore the e9piry o" the period o" two years in the case o" $anking co%panies incorporated in Pakistan and o" si9 %onths in the case o" $anking co%panies incorporated outside Pakistan( Be"ore granting any license under this section+ the :tate Bank %ay re*uire to $e satis"ied $y an inspection o" the $ooks o" the co%pany or otherwise that all or any o" the "ollowing conditions are "ul"illed+ na%ely&- that the co%pany is or will $e in a position to pay its present or "uture depositors in "ull as their clai%s accrueJ that the a""airs o" the co%pany are not $eing or are not likely to $e conducted in a %anner detri%ental to the interests o" its present or "uture depositorsJ that in the case o" a co%pany incorporated outside Pakistan+ the >o!ern%ent or law o" the country in which it is incorporated pro!ides the sa%e "acilities to $anking co%panies registered in Pakistan as the >o!ern%ent or law o" Pakistan grants to $anking co%panies incorporated outside Pakistan and that the co%pany co%plies with all the pro!isions o" this =rdinance applica$le to $anking co%panies incorporated outside Pakistan( #he :tate Bank %ay cancel a license granted to a $anking co%pany under this section+N iC ," the co%pany ceases to carry on $anking $usiness in PakistanJ or Copyright Virtual ni!ersity o" Pakistan 65
Banking Laws and Practices-BNK 601 VU iiC ," the co%pany at any ti%e "ails to co%ply with any o" the conditions i%posed upon it under su$section 318J or iiiC ," at any ti%e+ any o" the conditions re"erred to in su$-section 3?8 ceases to $e "ul"illed& Pro!ided that $e"ore canceling a license under clause 3ii8 or clause 3iii8 o" this su$-section on the ground that the $anking co%pany has "ailed to co%ply with or has "ailed or ceased to "ul"ill any o" the conditions re"erred to therein+ the :tate Bank+ unless it is o" opinion that the delay will $e preDudicial to the interest o" the co%panyEs depositors or the pu$lic+ shall grant to the co%pany on such ter%s( 4ny $anking co%pany aggrie!ed $y the decision o" the :tate Bank canceling a license under this section %ay+ within thirty days "ro% the date on which such decision is co%%unicated to it apply "or re!iew to the Central Board o" the :tate Bank( #he decision o" the :tate Bank su$Dect to the result o" re!iew under su$-section 3B8+ i" any+ shall $e "inal( /ro)ibition o% advertising %or de(osits and collection: Sec !5+A Notwithstanding anything contained in any other law "or the ti%e $eing in "orce+ no co%pany+ "ir% or person+ not $eing a $anking co%pany or a corporation or authority esta$lished $y the /ederal >o!ern%ent or a co%pany duly authori2ed in this $ehal" $y the Controller o" Capital ,ssues or the Corporate law 4uthority or the ;egistrar Co-operati!e :ocieties shall solicit or in!ite deposits o" %oney "ro% the pu$lic through ad!ertise%ents in the pu$lic %edia or $y postal circulars+ hand$ills+ displays in pu$lic places or $y any other %eans+ or collect or recei!e any deposits o" %oney in pursuance thereo"( EB(lanationCD/or the purposes o" this section+ Fdeposits o" %oneyG shall $e dee%ed to include %oney called+ in!ited or collected "or the purpose+ or declared o$Dect+ o" in!est%ent or $orrowing in any $usiness carried on+ or proposed to $e carried on+ $y the co%pany+ "ir% or person $y who%+ or on whose $ehal"+ such %oney is called+ in!ited+ collected or recei!ed irrespecti!e or the nature o" the relationship+ arrange%ent or ter%s o""ered or pro!ided $y such co%pany+ "ir% or person to the person %aking the in!est%ent+ deposits o" %oney or pay%ent or o" the $asis or understanding or which the %oney is so called+ in!ited+ collected or recei!ed( Restrictions on o(ening o% ne', and trans%er o% eBisting (lace o% business: Sec !6 No $anking co%pany shall open a new place o" $usiness in any part o" Pakistan or change+ otherwise than within the sa%e city+ town or !illage the location o" an e9isting place o" $usiness situated in any part o" Pakistan and No $anking co%pany incorporated in Pakistan shall open a new place o" $usiness outside Pakistan or change+ otherwise than within the sa%e city+ town or !illage in any country or area outside Pakistan+ the location o" an e9isting place o" $usiness situated in that country area without "irst o$taining the prior per%ission in writing o" the :tate Bank Nothing in this section shall apply to the opening "or a period not e9ceeding one %onth o" a te%porary place o" $usiness within a city+ town or !illage or the en!irons thereo" within which the $anking co%pany already has a place o" $usiness+ "or the purpose o" a""ording $anking "acilities to the pu$lic on the occasion o" an e9hi$ition+ a con"erence or a %ela or any other like occasion Pro!ided inti%ation o" such opening is gi!en to the :tate Bank within one week o" the date o" opening( #he :tate Bank %ay+ $e"ore gi!ing the per%ission to any $anking co%pany+ re*uire to $e satis"ied $y an inspection under section 70 or otherwise regarding such aspects o" the co%panyEs a""airs as the :tate Bank %ay dee% necessary( Maintenance o% li:uid asset: Sec !)!ery $anking co%pany Fand e!ery "inancial institution speci"ied in section ?4 + shall %aintain in Pakistan in cash+ gold or unencu%$ered appro!ed securities !alued at a price not e9ceeding Fthe lower o" the cost orG the current %arket price an a%ount which shall not at the close o" $usiness on any day $e less than Fsuch percentageG o" the total o" its time and demand liabilities in /a$istan + as %ay $e noti"ied $y the :tate Bank "ro% ti%e to ti%e( 66 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU Pro!ided that the :tate Bank %ay separately speci"y "or $anking co%panies or "inancial institutions the applica$le percentage either in general or in relation to any class o" $anking co%panies or any class o" "inancial institutions or to any $ank or "inancial institution in particular( EB(lanation: /or the purpose o" this section+ Funencu%$ered appro!ed securitiesG o" a $anking co%pany For "inancial institutionG shall include its appro!ed securities lodged with another institution "or an ad!ance or any other credit arrange%ent to the e9tent to which such securities ha!e not $een drawn against or a!ailed o" Kand the lia$ilities shall not include the paid up capital or the reser!es or any credit $alance in the pro"it and loss account o" the Banking co%pany or+ as the case %ay $e+ the "inancial institution or any such lia$ilities as %ay $e noti"ied $y the :tate Bank "or the purposes o" this in co%puting the a%ount pro!ided "or in su$-section 318+ any deposit re*uired under the pro!iso to su$-section 3?8 o" section 1? to $e %ade with the :tate Bank $y a $anking co%pany incorporated outside Pakistan and any $alances %aintained in Pakistan $y a $anking co%pany in current account with the :tate Bank or its agent or $oth including in the case o" a scheduled $ank the $alance re*uired to $e so %aintained under section ?6 o" :BP 4ct+ 15B6 )!ery $anking co%pany shall+ $e"ore the close o" the %onth succeeding the %onth to which the return relates+ "urnish to the :tate Bank a %onthly return in the prescri$ed "or% and %anner showing particulars o" the co%panyEs assets %aintained in accordance with this section Assets in /a$istan: Sec *8 4t the close o" $usiness on any day the assets in Pakistan o" e!ery $anking co%pany shall not $e less in !alue than an a%ount representing such percentage o" its ti%e and de%and lia$ilities in Pakistan as %ay $e prescri$ed $y the :tate Bank "ro% ti%e to ti%e pro!ided that the percentage so prescri$ed shall not e9ceed eighty "i!e per cent( 4t the close o" $usiness on any day the assets in Pakistan o" e!ery $anking co%pany shall not $e less in !alue than an a%ount representing such percentage o" its ti%e and de%and lia$ilities in Pakistan as %ay $e prescri$ed $y the :tate Bank "ro% ti%e to ti%e pro!ided that the percentage so prescri$ed shall not e9ceed eighty "i!e per cent( )!ery $anking co%pany shall+ $e"ore the close o" the %onth succeeding that to which the return relates+ "urnish to the :tate Bank+ in the prescri$ed "or% and %anner a %onthly return showing particulars o" the co%panyEs assets %aintained in accordance with this section and its ti%e and de%and lia$ilities in Pakistan at the close o" $usiness in e!ery #hursday Fassets in PakistanG shall $e dee%ed to include e9port $ills drawn in+ and i%port $ills drawn on and paya$le in Pakistan and e9pressed in such currencies as the :BP %ay "ro% ti%e to ti%e appro!e in this $ehal" and also such securities as the :BP %ay appro!e in this $ehal" notwithstanding that all or any o" the said $ills or securities are held outside Pakistan+ $ut shall e9clude such assets as in the opinion o" the :BP cannot properly $e regarded as assetsJ 3$8 FLia$ilities in PakistanG shall not include the paid-up capital or the reser!es or any credit $alance in the pro"it and loss account o" the $anking co%pany( FLia$ilities in PakistanG shall not include the paid-up capital or the reser!es or any credit $alance in the pro"it and loss account o" the $anking co%pany( Unclaimed de(osits and articles o% value: Sec * ; <2)ereD 3a8 a de$t paya$le in Pakistan currency is owing $y a $anking co%pany $y reason o" a deposit+ not $eing a deposit in the na%e o" a %inor or a >o!ern%ent or a court o" law+ at a $ranch o" the $anking co%pany in Pakistan in respect o" which no transaction has taken place and no state%ent o" account has $een re*uested or acknowledged $y the creditor during a period o" ten years reckonedN3i8 in the case o" a deposit %ade "or a "i9ed period+ "ro% the day on which the "i9ed period ter%inated+ and 3ii8 in the case o" any other deposit+ "ro% the day on which the last transaction took place or a state%ent o" account was last re*uested or acknowledged $y the creditor+ whiche!er is laterJ or 3$8 a di!idend+ $onus+ pro"it or other su% o" %oney whatsoe!er which has $eco%e due on a deposit and re%ained unpaid or Copyright Virtual ni!ersity o" Pakistan 67
Banking Laws and Practices-BNK 601 VU unacknowledged $y the creditor "or period o" ten years reckoned "ro% the date on which the di!idend+ $onus+ pro"it or other su% o" %oney+ as the case %ay $e+ $eca%e due and paya$leJ or 3c8 a che*ues+ dra"t or $ill o" e9change including an instru%ent drawn $y one $ranch o" the $anking co%pany upon another such $ranch paya$le in Pakistan currency has $een issued+ certi"ied or accepted $y a $anking co%pany at a $ranch o" the $anking co%pany in Pakistan and no pay%ent has $een %ade in respect thereo" "or a period o" ten years "ro% the date o" issue+ certi"ication or acceptanceJ or 3d8 a security share+ goods or any !alua$le article+ hereina"ter collecti!ely and indi!idually called article+ lying in sa"e custody with a $anking co%pany has not $een inspected or acknowledged $y the person who deposited the article with the $anking co%pany "or a period o" ten years "ro% the day on which it was last inspected or acknowledged $y such personJ the $anking co%pany shall gi!e "orthwith a three %onthsE notice in writing $y registered post acknowledge%ent due to the creditor or the $ene"iciary o" the che*ue+ dra"t or $ill o" e9change or the person in whose na%e the article stands in the $ooks o" the $anking co%pany on his address last %ade known $y hi% to the $anking co%pany+ and i" on the e9piry o" the three %onthsE period no acknowledge%ent or reply is recei!ed "ro% the addressee+ the $anking co%pany shall pay or deli!er+ as the case %ay $e+ to the :tate Bank an a%ount e*ual to the a%ount+ owing $y the $anking co%pany in respect o" the de$t or to the a%ount that would $e owing i" the instru%ent had $een presented "or pay%ent+ including interest+ i" any+ or the article+ in accordance with the ter%s o" the de$t or instru%ent or o" the arrange%ent under which the article is lying in the sa"e custody o" the $anking co%pany+ an pay%ent or deli!ery accordingly shall discharge the $anking co%pany "ro% all lia$ilities in respect o" the de$t or instru%ent or to the a%ount that would $e owing i" the instru%ent had $een presented "or pay%ent+ including interest+ i" any or the article+ in accordance with the ter%s o" the de$t or instru%ent or o" the $anking co%pany+ and pay%ent or deli!ery accordingly shall discharge the $anking co%pany "ro% all lia$ilities in respect o" the de$t or instru%ent or article+ as the case %ay $e 3@8 4 notice re*uired to $e gi!en $y su$-section 318N 3a8 %ay+ in the case o" a "ir% or a 1indu undi!ided "a%ily $e addressed to any %e%$er o" the "ir% or the %anager or any adult %ale %e%$er o" the "a%ily and+ in the case o" any other association o" persons+ to the principal o""icer the roo"J 3$8 %ay $e gi!en to a duly authori2ed agent o" the person who% it is re*uired to $e gi!en or+ where he has died+ to his legal representati!e or where he has $een declared an insol!ent+ to his assignee+ pro!ided the $anking co%pany has had notice o" appoint%ent o" the agent or o" the death or insol!ency o" the person to who% it is re*uired to $e gi!enJ 3c8 shall+ in the case o" Doint creditor or %ore than one $ene"iciaries o" a che*ue+ dra"t or $ill o" e9change or article standing in the na%es o" %ore than one person+ $e dee%ed to $e su""icient notice to all such persons i" gi!en to any one o" the%J and 3d8 shall+ notwithstanding the "act that it is %iscarried or the addressee is dead or insane or has $eco%e insol!ent or the en!elope or wrapper is returned with the postal endorse%ent Faddressee is untracea$leG or any other like endorse%ent+ $e dee%ed to ha!e $een ser!ed on the "i"teenth day "ollowing the day on which the en!elope or wrapper in which it is contained is posted+ i" it is properly addressed+ prepaid and posted+ pro!ided the $anking co%pany has had no notice o" the death+ insanity or insol!ency o" the person to who% it is re*uired to $e gi!en( 3?8 4 certi"icate in writing under the signature o" an e%ployee o" the $anking co%pany whose duty it is to address+ prepay and post letters on $ehal" o" the $anking co%pany to the e""ect that the en!elope or wrapper containing a notice re*uired to $e gi!en $y su$-section 318 was addressed+ prepaid and posted shall $e conclusi!e e!idence o" its ha!ing $een so addressed+ prepaid and posted( 378 4s soon as an a%ount is paid $y a $anking co%pany to the :tate Bank under su$-section 318+ it shall cease to $ear interest Tor rank "or a share o" pro"it or lossUV notwithstanding anything to the contrary contained in the ter%s o" the de$t or instru%ent or any law "or the ti%e $eing in "orce( 3B8 <here any $anking co%pany has paid an a%ount or deli!ered an article to the :tate Bank under su$-section 318+ the $anking co%pany shall preser!e and continue to preser!e all signature cards and signing authorities and other docu%ents relating to the de$t or instru%ent or article+ as the case %ay $e+ until it is in"or%ed $y the :tate Bank in writing that they need not $e preser!ed any longer( 368 Nothing in the Li%itation 4ct+ 150C+ or in any other law "or the ti%e $eing in "orce shall a""ect the lia$ility o" a $anking co%pany toward the :tate Bank under su$-section 318( 368 )!ery $anking co%pany shall+ within thirty days a"ter the close o" each calendar year+ su$%it to the :tate Bank a return in the prescri$ed "or% and %anner o" all unclai%ed a%ounts and articles re%aining unpaid or undeli!ered+ as the case %ay $e+ in the $ooks o" the $anking co%pany+ a"ter the e9piry o" ten years as reckoned under su$-section 318( 3C8 #he :tate Bank shall 68 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU pu$lish in the >a2ette o" Pakistan and not less than two newspapers once each *uarter "or a period o" one year a list o" the a%ounts and articles recei!ed $y the :tate Bank under su$-section 318 and not clai%ed $y any person& Pro!ided that it shall not $e necessary to include in a list so pu$lished such a%ounts and articles o" such !alue as the /ederal >o!ern%ent %ay "ro% ti%e to ti%e deter%ine( 358 4ny $anking co%pany which has paid any a%ount or deli!ered any article to the :tate Bank in accordance with su$-section 318 %ay+ within thirty days "ro% the date o" such pay%ent or deli!ery+ as the case %ay $e+ su$%it to the :tate Bank its clai% as regards lien+ counter-clai% or right o" set-o"" in relation to the a%ount so paid or article so deli!ered( 3108 4ny person who clai%s to $e entitled to any %oney or article paid or deli!ered to the :tate Bank under su$-section 318 %ay su$%it his clai% to the :tate Bank( 3118 :u$Dect to su$-sections 358+ 31@8 and 3178+ the :tate Bank %ay pass such order on a clai% su$%itted to it under su$-section 358 or su$ section 3108 as it %ay dee% "it+ and+ where the :tate Bank %akes any pay%ent or deli!ers any article to any person su$%itting a clai% under su$-section 3108 a receipt gi!en $y hi% shall $e a good discharge to the :tate Bank( 31@8 ," any action in!ol!ing a dispute a$out the ownership o" any a%ount or article paid or deli!ered to the :tate Bank under su$-section 318 is pending in any court $e"ore the e9piry o" one year "ollowing the year in which the a%ount or article is so paid or deli!ered to the :tate Bank and the :tate Bank recei!es an inti%ation "ro% the court or otherwise a$out such dispute+ it shall retain the a%ount or article in the custody and dispose o" it in accordance with the decision o" the court( 31?8 :u$Dect to su$-sections 358+ 31@8 and 3178+ any a%ount or article in respect o" which no clai% is pre"erred or a$out the disposal o" which no in"or%ation is recei!ed "ro% any person $e"ore the e9piry o" one year "ollowing the year in which the a%ount or article is recei!ed $y the :tate Bank shall+ on the e9piry o" the said period o" the said period o" one year+ cease to $e cli%$a$le and shall+ $eco%e the a$solute property o" and !est(N 3a8 in the >o!ern%ent o" the Pro!ince in the territory o" which the de$t or instru%ent was paya$le or + as the case %ay $e the article was to $e deli!ered+ and 3$8 in the /ederal >o!ern%ent in any other case( 3178 Notwithstanding anything contained in su$-section 318 a$out the gi!ing o" a notice $y a $anking co%pany to any creditor or $ene"iciary o" any che*ue+ dra"t or in su$section 3C8 a$out the pu$lication $y the :tate Bank o" the list o" unclai%ed a%ounts or articles+ the procedure to $e "ollowed and the %anner o" disposal o" de$ts+ instru%ents and articles in a case where the person concerned is not "or the ti%e $eing residing in Pakistan shall $e such as %ay $e deter%ined $y the /ederal >o!ern%ent "ro% ti%e to ti%e( 31B8 4ny decision o" the :tate Bank under su$-section 3118 a$out the acceptance+ satis"action or otherwise o" the lien+ right o" set-o"" or counter-clai% o" a $anking co%pany or+ as the case %ay $e+ the entitle%ent o" any person to any %oney or article recei!ed $y the :tate Bank under su$-section 318 shall $e "inal and shall not+ e9cept as pro!ided in su$section 3168+ $e called in *uestion in any %anner $y or $e"ore any court+ tri$unal or other authority( 3168 4ny person aggrie!ed $y a decision o" the :tate Bank under su$section 3118 %ay+ within one %onth "ro% the date o" the decision+ pre"er an appeal to such o""icer o" the :tate Bank superior in rank to the o""icer $y who% the decision appealed against was gi!en as %ay $e authori2ed in this $ehal" $y the >o!ernor or the :tate Bank( 3168 /or the purpose o" adDudicating and deter%ining any clai% under su$-section 358 or su$-section 3108 or deciding any appeal under su$section 3168 the :tate Bank shall "ollow such procedure as %ay $e prescri$ed and shall ha!e the sa%e powers as are !ested in a court under the Code o" Ci!il Procedure+ 150C 34ct V o" 150C8+ when trying a suit in respect o" the "ollowing %atters+ na%ely&- 3a8 en"orcing the attendance o" any person and e9a%ining hi% on oathJ 3$8 co%pelling the production o" docu%ents and %aterials o$DectsJ and 3c8 issuing co%%issions "or the e9a%ination o" witnesses( 31C8 4ny proceeding $e"ore the :tate Bank under this section shall $e dee%ed to $e a FDudicial proceedingG within the %eaning o" section @@C o" the Pakistan Penal Code + and the :tate Bank shall+ "or the purposes o" any such proceeding+ $e dee%ed to $e a FCi!il CourtG within the %eaning o" section 7C0 o" the Code o" Cri%inal Procedure+ 1C5C 3158 No court "ee shall $e paya$le "or "iling+ e9hi$iting or recording any docu%ent in+ or o$taining any docu%ent "ro%+ the :tate Bank in any proceeding under this section( 2e s)all continue 'it) some more (rovisions contained in t)e &an$ing Com(anies Ordinance, -.!C
69
Banking Laws and Practices-BNK 601 &AN>?NG COM/AN?ES OR7?NANCE, -.! ?n t)is 4esson 'e s)all cover t)e %ollo'ing as(ects o% t)is Ordinance: o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o
VU LESSON 14
Power to pu$lish in"or%ation /idelity and secrecy( >uidelines $y the :tate Bank( 4ccounts and $alance-sheet( 4udit( :u$%ission o" returns( Copies o" Balance :heets+ and 4ccounts to $e sent to ;egistrar( 'isplay o" audited $alance sheet $y $anking co%panies ,ncorporated outside Pakistan( 4ccounting pro!isions o" this =rdinance not retrospecti!e( ,nspection( ;esponsi$ility o" :tate Bank( Power o" the :tate Bank to gi!e directions( Power o" the :tate Bank to re%o!e directors or other %anagerial persons "ro% o""ice( Power o" the :tate Bank to supersede Board o" 'irectors o" a $anking co%pany( Li%itations( Prosecution o" directors+ Chie" )9ecuti!es or other =""icers( /urther powers and "unctions o" the :tate Bank( Certain pro!isions o" the =rdinance not to apply to certain $anking co%panies( Power to call "or certain in"or%ation+ etc( :pecial pro!isions( Power to %ake declaration( Conse*uences o" a declaration under section 7?B( 'eposit o" cash and preser!ation o" assets+ etc( :tate%ent o" assets and lia$ilities to $e su$%itted to :tate Bank( Conse*uential pro!isions "or winding up+ etc( ;estriction on stay order( ;estriction on co%pro%ise or arrange%ent $etween $anking co%panies and creditors( Power o" :tate Bank to apply to /ederal >o!ern%ent "or suspension o" $usiness $y a $anking co%pany and to prepare sche%e o" reconstruction or a%alga%ation( Procedure "or a%alga%ation o" $anking co%panies( <inding up $y 1igh Court( Court Li*uidator(
Aal%+#earl# returns and (o'er to call %or ot)er returns and in%ormation /o'er to (ublis) in%ormation: Sec ** #he :tate Bank+ i" it considers it in the pu$lic interest so to do+ %ay pu$lish any in"or%ation o$tained $y it under this =rdinance in such consolidated "or% as it thinks "it( "idelit# and secrec#: Sec **+A :u$Dect to su$-section 378+ e!ery $ank and "inancial institution shall+ e9cept as otherwise re*uired $y law+ o$ser!e the practices and usage custo%ary a%ong $ankers and+ in particular+ shall not di!ulge any in"or%ation relating to the a""airs o" its custo%ers e9cept in circu%stances in which it is + in accordance with law+ practice and usage custo%ary a%ong $ankers+ necessary or appropriate "or a $ank to di!ulge such in"or%ation( 70 Copyright Virtual ni!ersity o" Pakistan
VU
)!ery president+ chair%an+ %e%$er o" the Board+ ad%inistrator+ auditor+ ad!iser+ o""icer or other e%ployee o" any $ank and "inancial institution shall+ $e"ore entering upon his o""ice+ %ake a declaration o" "idelity and secrecy in such "or% as %ay $e prescri$ed( Notwithstanding anything contained in su$-section 318 and 3@8+ e!ery $alance sheet and pro"it and loss account state%ent prepared $y a $ank and "inancial institution shall include state%ents prepared in such "or% and %anner as the :tate Bank %ay speci"y in respect o" written o"" loans or any other "inancial relie" o" "i!e hundred thousand repress or a$o!e allowed to a person as well as the pro!ision+ i" any+ %ade "or $ad or dou$t"ul de$ts( #he :BP %ay+ i" satis"ied that it is necessary so to do at the ti%e o" holding general elections under any law relating thereto+ pu$lish a list o" persons to who% any loans+ ad!ances or credits were e9tended $y a $ank or "inancial institution+ either in their own na%es or in the na%es o" their spouses or dependents or o" their $usiness concerns 3i" %ainly owned and %anaged $y the%8which were due and paya$le and had not $een paid $ack "or %ore than one year "ro% the due date+ or whose loans were unDusti"ia$ly written o"" in !iolation o" $anking practices+ rules or regulations on or a"ter such date as %ay $e deter%ined $y the >o!ern%ent& Pro!ided the $e"ore pu$lishing the na%e o" any person in any such list he shall $e+ gi!en prior notice and+ i" he so re*uests+ an opportunity o" hearing( Accounts and balance+s)eet: Sec *1 C 4t the e9piration o" each calendar year e!ery $anking co%pany incorporated in Pakistan+ in respect o" all $usiness transacted $y it+ and e!ery $anking co%pany incorporated outside Pakistan+ in respect o" all $usiness transact through its $ranches in Pakistan+ shall prepare with re"erence to that year a $alance -sheet and pro"it and loss account as on the last working day o" the year in the "or%s set out in the :econd :chedule or as near thereto as circu%stances ad%it( !C #he $alance sheet and pro"it and loss account shall $e signed(N 3a8 in the case o" a $anking co%pany incorporated in Pakistan+ $y the %anager or the principal o""icer o" the co%pany and where there are %ore than three directors o" the co%pany+ $y at least three o" those directors+ or where there are not %ore than three directors+ $y all the directors+ and 3$8 in the case o" a $anking co%pany incorporated outside Pakistan $y the %anager or agent o" the principal o""ice o" the co%pany in Pakistan and $y another o""icer ne9t in seniority to the %anager or agent( *C Notwithstanding that the $alance sheet o" a $anking co%pany is under su$section 318 re*uired to $e prepared in a "or% other than the "or% %arked K/E in the #hird :chedule to the Co%panies 4ct+ 151? 3V,, o" 151?8+ the re*uire%ents o" that 4ct relating to the $alance sheet and pro"it and loss account o" a co%pany shall+ in so "ar as they are not inconsistent with this =rdinance+ apply to the $alance-sheet o" pro"it and loss account+ as the case %ay $e+ o" a $anking co%pany( #he :tate Bank %ay+ a"ter gi!ing not less than "i"teen days notice o" its intention so to do+ "or% ti%e to ti%e $y a noti"ication in the o""icial >a2ette+ a%end the "or%s set out in the :econd :chedule( Audit: Sec *0 #he $alance sheet and pro"it and loss account prepared in accordance with section ?7 shall $e audited $y a person who is duly *uali"ied+ under the Chartered 4ccountants =rdinance+ 1561 3S o" 15618+ or any other law "or the ti%e $eing in "orce+ to $e an auditor o" co%panies and is $orne on the panel o" auditors %aintained $y the :tate Bank "or the purposes o" audit o" $anking co%panies( C 4n auditor shall hold o""ice "or a period o" three years and shall not $e re%o!ed "ro% o""ice $e"ore the e9piry o" that period e9cept with the prior appro!al o" the :tate Bank( !C #he :tate Bank %ay+ "ro% ti%e to ti%e+ lay down guidelines "or the audit o" $anking co%panies and the auditors shall $e $ound to "ollow those guidelines( *C :u$Dect to the pro!isions o" su$-section 3@8+ the auditor shall ha!e the powers o"+ e9ercise the "unctions !ested in+ and discharge the duties and $e su$Dect to the lia$ilities and penalties i%posed on+ auditors o" co%panies $y section 17B o" the Co%panies 4ct+ 151? 3V,, o" 151?8( 1C ,n addition to the %atters which+ under the a"oresaid 4ct and the guidelines laid down $y the :tate Bank under su$-section 3?8+ the auditor is re*uired to state in his report+ he shall also stateN Copyright Virtual ni!ersity o" Pakistan 71
Banking Laws and Practices-BNK 601 VU a< <hether or not the in"or%ation and e9planations re*uired $y hi% ha!e $een "ound to $e satis"actoryJ b< <hether or not the transactions o" the $anking co%pany which ha!e co%e to his notice ha!e $een with in the powers o" the $anking co%panyJ c< <hether or not the returns recei!ed "ro% $ranch o""ices o" the $anking co%pany ha!e $een "ound ade*uate "or the purposes o" his auditJ d< <hether the pro"it and loss account shows a true $alance o" pro"it and loss "or the period co!ered $y such accountJ and any other %atter which he considers should $e $rought to the notice o" the shareholders o" the $anking co%pany( Submission o% returns: Sec *. #he accounts and $alance-sheet re"erred to in section ?7 together with the auditorEs report as passed in the 4nnual >eneral -eeting shall $e "urnished as returns to the :tate Bank within three %onths o" the close o" the period to which they relate& Pro!ided that the :tate Bank %ay in special circu%stances e9tend the said period o" three %onths "or the "urnishing o" such returns $y a "urther period not e9ceeding three %onths( Sus(ension o% business and 'inding u( o% ban$ing com(anies ,%portant aspects under this head are outlined $elow& -- =perations o" a Banking Co%pany %ay $e suspended under this =rdinance( -- 1igh Court is the Dudicial "oru% "or <inding up o" Banking Co%pany( -- 1igh Court %ay also stay proceedings against a Banking Co%pany initiated $y :BP 3%a9i%u% stay can $e granted up to si9 %onths8 copy o" stay order shall $e "orwarded to :BP $y 1igh Court( :pecial o""icer %ay $e appointed $y 1igh Court( -- 4pplication %ay $e su$%itted $y :BP to 1igh Court "or winding up o" a Banking Co%pany+ i" satis"ied that a""airs o" Banking Co%pany are $eing conducted in a %anner detri%ental to the interests o" depositors( ,n this regard+ the statutory pro!isions has contained in !arious sections o" the =rdinance are reproduced $elow& Aig) Court de%ined: Sec 11 ,n this Part and in Part ,V F1igh CourtG+ in relation to a $anking co%pany+ %eans the 1igh Court e9ercising Durisdiction in the place where the registered o""ice o" the $anking co%pany is situated or+ in the case o" a $anking co%pany incorporated outside Pakistan+ where its principal place o" $usiness in Pakistan is situated( Restriction on sta# order: Sec 10 #he 1igh Court %ay+ on the application o" a $anking co%pany which is te%porarily una$le to %eet its o$ligations %ake an order staying "or a "i9ed period on such ter%s and conditions as it %ay think "it the co%%ence%ent or continuance o" all proceedings against the co%pany and %ay "ro% ti%e to ti%e e9tend the period so howe!er that the total period including the period o" any stay order granted under the pro!iso to su$-section 3@8+ shall not e9ceed si9 %onths( )9cept as hereina"ter pro!ided no order o" stay shall $e granted upon such application unless it is acco%panied $y a report o" the :tate Bank showing that in the opinion o" the :tate Bank the $anking co%pany will $e a$le to pay its de$ts i" the application is granted( Pro!ided that in the case o" an application not so acco%panied the 1igh Court %ay+ i" it thinks "it+ grant stay "or a period o" not %ore than thirty days in aggregate+ and+ i" such stay is granted+ shall call "or a report "ro% the :tate Bank on the a""airs o" the $anking co%pany+ on receipt o" which it %ay either rescind an order already passed or pass such "urther orders as it %ay consider Dust and proper in the circu%stances( 72 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU #he 1igh Court shall "orward to the :tate Bank a copy o" e!ery stay order %ade under this section(378 <here an application is %ade under su$-section 318+ the 1igh Court %ay appoint a special o""icer who shall "orthwith take into his custody or under his control all the assets+ $ooks+ docu%ents+ e""ects and actiona$le clai%s to which the $anking co%pany is or appears to $e entitled and shall also e9ercise such other powers as the interests o" the depositors o" the $anking co%pany( Restriction on com(romise or arrangement bet'een ban$ing com(anies and creditors: Sec 1. Notwithstanding anything contained in any law "or the ti%e $eing in "orce+ no 1igh Court shall sanction a co%pro%ise or arrange%ent $etween a $anking co%pany and its creditors or any class o" the% or $etween such co%pany and its %e%$ers or any class o" the% unless the co%pro%ise or arrange%ent is certi"ied $y the :tate Bank in writing as not $eing incapa$le o" $eing worked and as not $eing detri%ental to the interests o" the depositors o" such $anking co%pany( <here an application under section 1B? o" the Co%panies 4ct+ 151? 3V,, o" 151?8+ is %ade in respect o" a $anking co%pany+ the 1igh Court %ay direct the :tate Bank to %ake an in*uiry in relation to the a""airs o" the $anking co%pany and the conduct o" its directors and when such a direction is gi!en+ the :tate Bank shall %ake such in*uiry and su$%it its report to the 1igh Court( /o'ers o% State &an$ to a((l# to "ederal Government %or sus(ension o% business b# a ban$ing com(an# and to (re(are sc)eme o% reconstruction or amalgamation: Sec 15 Notwithstanding anything contained in the pro!isions o" this Part or in any other law or any agree%ent or other instru%ent+ "or the ti%e $eing in "orce+ where it appears to the :tate Bank that there is good reason so to do+ the :tate Bank %ay apply to the /ederal >o!ern%ent "or an order o" %oratoriu% in respect o" a $anking co%pany( #he /ederal >o!ern%ent+ a"ter considering the application %ade $y the :tate Bank under su$-section 318+ %ay %ake an order o" %oratoriu% staying the co%%ence%ent or continuance o" all action and proceedings against the co%pany "or a "i9ed period o" ti%e on such ter%s and conditions as it thinks "it and proper and %ay "ro% ti%e to ti%e e9tend the period so howe!er that the total period o" %oratoriu% shall not e9ceed si9 %onths( )9cept as otherwise pro!ided $y any directions gi!en $y the /ederal >o!ern%ent in the order %ade $y it under su$-section 3@8 or at any ti%e therea"ter+ the $anking co%pany shall not during the period o" %oratoriu% %ake any pay%ent to any depositors or discharge any lia$ilities or o$ligations to any other creditors( 'uring the period o" %oratoriu%+ i" the :tate Bank is satis"ied that3prepare sche%e "or reconstruction in the pu$lic interestJ or in the interests o" the depositorsJ or in order to secure the proper %anage%ent or the $anking co%panyJ or in the interests o" the $anking syste% o" the country as a whole/rocedure %or amalgamation o% ban$ing com(anies: Sec 16 Notwithstanding anything contained in any law "or the ti%e $eing in "orce+ no $anking co%pany shall $e a%alga%ated with another $anking co%pany+ unless a sche%e containing the ter%s o" such a%alga%ation has $een placed in dra"t $e"ore the shareholders o" each o" the $anking co%panies concerned separately+ and appro!ed $y a resolution passed $y a %aDority in nu%$er representing two thirds in !alue o" the shareholders o" each o" the said co%panies+ present either in person or $y pro9y at a %eeting called "or the purpose( < Notice o" e!ery such %eting as is re"erred to in su$-section 318 shall $e gi!en to e!ery shareholder o" each o" the $anking co%panies concerned in accordance with the rele!ant articles o" association+ indicating the ti%e+ place and o$Dect o" the %eeting+ and shall also $e pu$lished at least once a week "or three consecuti!e weeks in not less than two newspapers which circulate in the locality or localities where the registered o""ices o" the $anking co%panies concerned are situated+ one o" such newspapers $eing in a language co%%only understood in the locality or localities( 4ny shareholder+ who has !oted against the sche%e+ o" a%alga%ation at the %eeting or has gi!en notice in writing at or prior to the %eeting to the co%pany concerned or the presiding o""icer o" the %eeting that he dissents "ro% the sche%e o" a%alga%ation+ shall $e entitled+ in the e!ent o" the sche%e $eing sanctioned $y the :tate Bank to clai% "ro% the $anking co%pany concerned+ in respect o" the shares held $y hi% in that co%pany+ their !alue as deter%ined $y the :tate Bank when sanctioning the Copyright Virtual ni!ersity o" Pakistan 73
Banking Laws and Practices-BNK 601 VU sche%e and such deter%ination $y the :tate Bank as to the !alue o" the shares to $e paid to dissenting shareholder shall $e "inal "or all purposes( !< ," the sche%e o" a%alga%ation is appro!ed $y the re*uisite %aDority o" shareholders in accordance with the pro!isions o" this section+ it shall $e su$%itted to the :tate Bank "or sanction and shall+ i" sanctioned $y the :tate Bank $y an order in writing passed in this $ehal" $e $inding on the Banking $y an order in writing passed in this $ehal" $e $inding on the $anking co%panies concerned and also on all the shareholders thereo"( *< <here a sche%e o" a%alga%ation is sanctioned $y the :tate Bank under the pro!isions o" this section+ the :tate Bank shall trans%it a copy o" the order sanctioning the sche%e to t)e registrar $e"ore who% the $anking co%panies concerned ha!e $een registered and the registrar shall+ on receipt o" any such order+ strike o"" the na%e o" the co%pany which $y reason o" the a%alga%ation will cease to "unction( 2inding u( b# Aig) Court: Sec 1Notwithstanding anything contained in section 1B?+ section 16@ and section @61 o" the Co%panies 4ct+ 151? 3V,, o" 151?8+ $ut and section @61 o" the Co%panies 4ct+ 151? 3V,, o" 151?8+ $ut without preDudice to its powers under the su$-section 318 o" section 7B o" this =rdinance+ the 1igh Court shall order the winding up o" a $anking co%panyN i" the $anking co%pany is una$le to pay its de$tsJ or i" an application "or its winding up has $een %ade $y the :tate Bank under section 7B or this section( #he :tate Bank shall %ake an application under this section "or the winding up o" a $anking co%pany i" it is directed so to do $y an order under clause 3$8 o" su$-section 368 o" section 70( #he :tate Bank %ay %ake an application under this section "or the winding up o" a $anking co%panyN has "ailed to co%pany with the re*uire%ents speci"ied in section 1?J or has $e reason o" the pro!isions o" section @6 $eco%e disentitled to carry on $anking $usiness in PakistanJ or has $een prohi$ited "ro% recei!ing "resh deposits $y an order under clause 3a8 o" su$-section 368 o" section 70+ or under clause 3$8 a co%pro%ise or arrange%ent sanctioned $y a Court in respect o" the $anking co%pany cannot $e worked satis"actorily with or %odi"icationsJ or the returns+ state%ents or in"or%ation "urnished to it under or in pursuance o" the pro!isions o" this =rdinance disclose that the $anking co%pany is una$le to pay its de$tsJ or the continuance o" the $anking co%pany is preDudicial to the interest o" its depositors( 4 copy o" e!ery application %ade $y the :tate Bank under su$-section 318 shall $e sent $y the :tate Bank to the registrar( Notwithstanding anything contained in the Co%panies 4ct+151?+ no court shall entertain an+ application "or winding up o" $anking co%pany $y the Court unless such application is acco%panied $y a certi"icate in writing "ro% the :BP certi"ying that it has no o$Dection to the %aking o" application( Court 4i:uidator: Sec 08 <hen+ ha!ing regard to the nu%$er o" proceedings "or the winding up o" $anking co%panies or the e9tent o" the work in!ol!ed in such proceedings+ in any Pro!ince or at any place in any Pro!ince+ the /ederal >o!ern%ent is o" the opinion that it is necessary or e9pedient to attach a court Li*uidator to the 1igh Court o" that pro!ince it %ay+ in consultation with the :tate Bank+ appoint a Court Li*uidator+ the pro!ince or at a place in Pro!ince+ and "or such ti%e as the /ederal >o!ern%ent %ay think "it+ "or the purpose o" conducting all proceedings "or the winding up o" $anking co%panies and per"or%ing such duties in re"erence thereto as the 1igh Court %ay i%pose( <here there is a court li*uidator attached to a 1igh Court and an order is passed $y the 1igh court "or the winding up o" any $anking co%pany+ then notwithstanding anything contained in section 1614 or section l6B o" the Co%panies 4ct+ 151? 3V,, o" 151?8+ the court li*uidator shall $eco%e the o""icial li*uidator o" the $anking co%pany( where there is a court li*uidator attached to a 1igh Court and any proceeding+ "or the winding up o" a $anking co%pany in which any person other than the :tate Bank or the court li*uidator has $een appointed as o""icial li*uidator+ is pending $e"ore the 1igh Court i%%ediately $e"ore the co%%ence%ent o" this =rdinance or the date on which the court li*uidator is so attached the 1igh court+ whiche!er is later+ then+ notwithstanding anything contained a section 166 o" the Co%panies 4ct+ 151? 3V,, o" 151?8+ the person appointed as o""icial li*uidator shall+ on such co%%ence%ent or+ as the case %ay $e+ on the a"oresaid date+ $e dee%ed to ha!e !acated his o""ice as such and the !acancy so 74 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU caused shall $e dee%ed to $e "illed up $y the appoint%ent o" the court li*uidator as the o""icial li*uidator& Pro!ided that where the 1igh Court+ a"ter gi!ing the court li*uidator and the :tate Bank an opportunity o" $eing heard+ is o" opinion that the appoint%ent o" the court li*uidator would $e detri%ental to the interests o" the depositors o" the $anking co%pany+ it %ay direct the person appointed as the o""icial li*uidator to continue to act as such( Pro!ided that where the 1igh Court+ a"ter gi!ing the court li*uidator and the :tate Bank an opportunity o" $eing heard+ is o" opinion that the appoint%ent o" the court li*uidator would $e detri%ental to the interests o" the depositors o" the $anking co%pany+ it %ay direct the person appointed as the o""icial li*uidator to continue to act as such( T)e remaining as(ects o% t)is Ordinance s)all be discussed in t)e coming 4esson
75
Banking Laws and Practices-BNK 601 &AN>?NG COM/AN?ES OR7?NANCE, -.! <e shall co!er the "ollowing aspects& =%$uds%anN'e"ined 1istorical Background :cope o" Banking -ohtasi$
VU LESSON 15
Ombudsman 7e%ined: 4ccording to ,nternational Bar 4ssociation+ =%$uds%an is de"ined as an Fo""iceG pro!ided $y the constitution or $y an action o" the legislature or parlia%ent and headed $y an independent+ high le!el pu$lic o""icial which is responsi$le to the legislature or parlia%ent+ who recei!es co%plaints "ro% the aggrie!ed person+ o""icial+ and e%ployees or who acts on his own %otion and has the power to in!estigate+ reco%%end correcti!e action and issue reports( 4 %an who in!estigates co%plaints and %ediates "air settle%ents+ especially $etween aggrie!ed parties such as consu%ers or students and an institution or organi2ation( 4 go!ern%ent o""icial+ especially in :candina!ian countries+ who in!estigates citi2ensH co%plaints against the go!ern%ent or its "unctionaries( Evolution ,n the %odern world+ an o%$uds%an was "irst esta$lished in 1C05 in :weden( #he word Fo%$uds%anG is o" :wedish origin and %eans Frepresentati!e or agentG o" the people( ,n 1515+ %ore than a century a"ter :weden appointed an o%$uds%an+ another :candina!ian country+ /inland+ adopted the :wedish %odel "or the redressal o" pu$lic grie!ances against agencies o" state( #he ne9t country to "ollow was 'en%ark - this happened %ore recently in 15BB( #he "irst country outside )urope to esta$lish such an o""ice was New Zealand( #his was in 156@ and generated tre%endous glo$al interest inspiring %any countries+ in search o" good go!ernance+ to launch such sche%es( #oday+ o!er 100 countries ha!e such a plat"or% in place( ,n 155B+ the )uropean nion esta$lished the "irst )uropean =%$uds%an under the -aastricht #reaty( <ith the spread o" education throughout the glo$e+ the cogni2ance and awareness as well as the desire "or hu%an rights+ $etter li!ing conditions+ pu$lics participatory role in the go!ernance o" state and esta$lish%ent o" N>=Es and a!aila$ility o" in"or%ation+ this desire "or the rule o" law and redressing the grie!ances o" the a""ected parties has e%erged as predo%inant "eature in the %odern society( ,nitially the role o" o" =%$uds%an was restricted to the co%plaints pertaining to the go!ern%ent depart%ents( But now there is a shi"t o" co%plaints towards pri!ate sector and as such =%$uds%an in the %odern days entertains co%plaints against pu$lic sector as well as pri!ate sector( 1owe!er the aggrie!ed party has the right to %o!e to a court o" law+ in case one is not satis"ied $y any decision o" =%$uds%an( ?m(ortant "eatures o% OmbudsmanFs 4a' <ide scope o" Aurisdiction o!er 4gencies and their "unctionaries( Powers "or !uo Motu cogni2ance( ;ight to undertake ;esearch and :tudies on i%portant issues in!ol!ing %al-ad%inistration( Pro!ision "or in"or%al resolution o" disputes( :pot inspection where re*uired( Powers to grant co%pensations to aggrie!e party $oth co%plainants and pu$lic ser!ants( #o reco%%end disciplinary action against delin*uent pu$lic ser!ants( Aistorical &ac$groundDin /a$istan3s (ers(ective 2a%a:i Mo)tasib& this was esta$lished in 15C? "ederal TaB Ombudsman& this was esta$lished in year @000 &an$ing Mo)tasib& it $eca%e "unctional "ro% @00B 76 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU 2a%a:i Mo)tasib: #he Constitution o" 156? included the /ederal =%$uds%an at ite% 1? o" the /ederal Legislati!e List in the /ourth :chedule( #he ,nstitution o" =%$uds%an was+ howe!er+ actually $rought into $eing through the )sta$lish%ent o" the =""ice o" <a"a*i -ohtasi$ 3=%$uds%an8 =rder+ 15C? 3PresidentEs =rder No( 1 o" 15C?+ which is a "or% o" law8( ,n order to ensure legal autono%y to the institution+ it is re"lected in :chedule 6 o" the 156? Constitution i%plying there$y that any a%end%ent can $e $rought a$out $y a two-third %aDority o" the Parlia%ent( Objective #he %ain purpose o" the <a"a*i -ohtasi$ is to diagnose+ in!estigate+ redress and recti"y any inDustice done to a person through %al-ad%inistration on the part o" a /ederal 4gency or a /ederal >o!ern%ent =""icial( #he pri%ary o$Decti!e o" the o""ice is to institutionali2e a syste% "or en"orcing ad%inistrati!e accounta$ility( "unctional Attributes o% t)e ?nstitution )asily accessi$le /ree o" cost /le9i$le in operation ,n"or%al procedure Pro%pt action :er!ice at the citi2enHs door-step &an$ing Mo)tasib: Sco(e: ,n relation to all $anks operating in Pakistan+ the Banking -ohtasi$ has $een e%powered to entertain co%plaints o" the "ollowing nature& /ailure to act in accordance with $anking laws and regulations including policy directi!es or guidelines issued $y the :tate Bank o" Pakistan "ro% ti%e to ti%e( C 'elays or "raud in relation to the pay%ent or collection o" che*ues+ dra"ts or other $anking instru%ents or trans"er o" "unds( !C /raudulent or unauthori2ed withdrawals or de$it entries in accounts( *C Co%plaints "ro% e9porters or i%porters+ relating to $anking ser!ices and o$ligations including letters o" credit( 1C Co%plaints "ro% holders o" "oreign currency accounts whether %aintained $y residents or nonresidents( 0C Co%plaints relating to re%ittances to or "ro% a$road( .C Co%plaints relating to pay%ent o" utility $ills( 5C 'elays or "raud in relation to the pay%ent or collection o" che*ues+ dra"ts or other $anking instru%ents or trans"er o" "unds( 6C /raudulent or unauthori2ed withdrawals or de$it entries in accounts( -C Co%plaints "ro% e9porters or i%porters+ relating to $anking ser!ices and o$ligations including letters o" credit( 8C Co%plaints "ro% holders o" "oreign currency accounts whether %aintained $y residents or nonresidents( C Co%plaints relating to re%ittances to or "ro% a$road( !C Co%plaints relating to pay%ent o" utility $ills( *C Co%plaints relating to re%ittances to or "ro% a$road( 1C Co%plaints relating to pay%ent o" utility $ills( Com(laints entertained b# &an$ing Mo)tasib Co%plaints can $e "iled with the Banking -ohtasi$ "or resolution o" grie!ances against scheduled $anks operating in Pakistan( 4lso $anks %ay lodge co%plaints against another $ank in case o" dispute( Copyright Virtual ni!ersity o" Pakistan 77
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T#(es o% Com(laints 4ll co%plaints reDected $y $anks can $e entertained $y the Banking -ohtasi$ pro!ided these are not $arred $y ti%e or records pertaining thereto ha!e not $een destroyed $y the $ank in accordance with its laid down record destruction policies( ;eDected co%plaints %ay also $e sent to Banking -ohtasi$ along with all related correspondence and the Co%plaint /or%+ without the need to gi!e 7B days notice to the concerned $ank( #he Banking -ohtasi$ handles co%plaints relating to !iolation o" $anking laws and regulations+ e9cessi!e delays and ine""iciency+ poor ser!ice+ discri%inatory actions+ etc( A((eal /rocess: Com(lainantFs rig)t o% a((eal 4 co%plainant not satis"ied with the decision o" the Banking -ohtasi$ has the right to appeal to the Governor+ :tate Bank o" Pakistan within ?0 days "ro% the date o" the order o" the Banking -ohtasi$( ," the co%plainant does not choose to go into appeal or does not accept the decision o" the :tate Bank o" Pakistan in appeal+ the co%plainant has the right to go to a court o" law( &an$Fs rig)t o% a((eal ,n case a $ank is not satis"ied with the Banking -ohtasi$Hs order in the %atter o" a co%plaint+ it %ay "ile an appeal with the >o!ernor+ :tate Bank o" Pakistan within thirty days( 1owe!er+ i" no appeal is "iled+ or the :tate Bank o" Pakistan does not uphold the appeal+ the Banking -ohtasi$Hs order shall $eco%e "inal+ operati!e and $inding upon the $ank( &ene%its o% Mo)tasib Sc)eme: o >lo$ally a pheno%enal success o 4 cost "ree ser!ice o Cost e""ecti!e "or $oth co%plainants and $anks o nlike the courts+ legal representation is neither re*uired nor ad!antageous o 4ccessi$le+ "riendly+ in"or%al and "le9i$le o o Co%plainants retain the right to take the %atter to court i" not satis"ied =%$uds%en are also success"ul $ecause they %ay pro!ide re%edies where none %ay $e a!aila$le through the "or%al syste%(
T)e (rovisions regarding establis)ment o% t)e o%%ice o% &an$ing mo)tasib are contained in section 6! o% &an$ing Com(anies Ordinance, -.!C T)e res(ective statutor# (rovisions are re(roduced )ereunderC A((ointment o% Mo)tasib: Sec 6!+A C #here shall $e a Banking -ohtasi$ who shall $e appointed $y the President in consultation with the >o!ernor o" the :tate Bank o" Pakistan( !C #he Banking -ohtasi$ shall $e a person o" high integrity and uni%peacha$le $anking or legal credentials who is not a share-holder o" a $anking co%pany or "inancial institution and is not or has not+ $een a $ank de"aulter( *C #he Durisdiction o" the Banking -ohtasi$ in relation to $anking transactions shall $e toN 3a8 en*uire into co%plaints o" $anking %alpracticesJ 3$8 per!erse+ ar$itrary or discri%inatory actionsJ 3c8 !iolations o" $anking laws+ rules+ regulations or guidelinesJ 3d8 inordinate delays or ine""iciency and 3e8 corruption+ nepotis% or other "or%s o" %alad%inistration( 1C #he Banking -ohtasi$ shall hold o""ice a period o" three years and shall not $e eligi$le "or any e9tension o" tenure or "or re-appoint%ent under any circu%stances whatsoe!er( 0C #he Banking -ohtasi$ shall not hold nay other o""ice o" pro"it in the ser!ice o" Pakistan or occupy any other position carrying the right to re%uneration "or the rendering o" ser!ices( Terms and conditions o% t)e &an$ing Mo)tasib Sec 6!+b 78 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU C #he Banking -ohtasi$ shall $e entitled to the sa%e salary and allowances as a Audge o" a 1igh Court( !C #he Banking -ohtasi$ %ay $e re%o!ed "ro% o""ice on the ground that he has $een guilty o" %isconduct or that he is incapa$le o" properly per"or%ing the duties o" his o""ice $y reason o" physical or %ental incapacity( Pro!ided that he shall ha!e the right to "ile an appeal $e"ore the /ederal :er!ices #ri$unal( *C #he Banking -ohtasi$ shall $e pro!ided with a secretariat to $e appointed in consultation with the :tate Bank( 4ppoint%ents to the :ecretariat %ay $e %ade on deputation "ro% the :tate Bank o" Pakistan or other $anks or otherwise on the $asis o" pro"essional *uali"ications and the costs o" the :ecretariat shall $e shared $y $anks in such proportions as %ay $e deter%ined $y the :tate Bank o" Pakistan( #he Banking -ohtasi$ shall ha!e the power and responsi$ilityN a< #o entertain co%plaints "ro% custo%ers+ $orrowers+ $anks or "ro% any concerned $ody or organi2ationJ b< #o "acilitate the a%ica$le resolution o" co%plaints a"ter gi!ing hearings to the co%plainant and the concerned $ankJ and c< ,n the e!ent that co%plaints cannot $e resol!ed $y consent+ to gi!e "inding which shall $e acted upon in the %anner set out herein( 1C #he Banking -ohtasi$ shall e9ercise his powers and authority in the "ollowing %anner&a< ,n relation to all $anks operating in Pakistan(N #he Banking -ohtasi$ shall $e authori2ed to entertain co%plaints o" the nature set out herein $elow&aC "ailure to act in accordance with $anking laws and regulations including policy directi!es or guidelines issued $y the :tate $ank "ro% ti%e to ti%e( bC Pro!ided that i" there is a dispute as to the proper interoperation o" any regulations+ directions or guidelines+ the sa%e shall $e re"erred to the :tate Bank "or clari"ication( delays or "raud in relation to the pay%ent or collection o" che*ues+ dra"ts or other $anking instru%ents or the trans"er o" "undsJ cC "raudulent or unauthori2ed withdrawals or de$it entries in accountsJ iC iiC iiiC ivC vC Co%plaints "ro% e9porters or i%porters relating to $anking ser!ices and o$ligations including letter o" creditsJ Co%plaints "ro% holders o" "oreign currency accounts+ whether %aintained $y residents or nonresidentsJ Co%plaints relating to re%ittances to or "ro% a$roadJ Co%plaints relating to %ark-up or interest rates $ased on the ground o" a !iolation o" an agree%ent or o" state $ank directi!esJ and Co%plaints relating to the pay%ent o" utility $ills(
$( ,n relation to $anks in the pu$lic sector( N #he Banking -ohtasi$ shall $e authori2ed to entertain co%plaints against such $anks on the "ollowing additional grounds as wellN iC Corrupt or %olli"ied practices $y $ank o""icersJ iiC >ross dereliction o" duty in dealing with custo%ersJ and iiiC ,nordinate delays in taking decisions( Re%erence to &an$ing Mo)tasib b# Court& Sec 6!+CN i" at any ti%e during the pendency o" a case+ a court trying a case relating to reco!ery o" loan $y a $anking co%pany is o" the opinion that the %anage%ent o" the $anking co%pany has pri%a "acie acted in a %ala"ide %anner+ or in !iolation o" $anking rules and regulations+ it %ay re"erence to the Banking -ohtasi$ "or in*uiring into the %atter and passing such order in accordance with the pro!isions hereo" as %ay dee% "it& Pro!ided that the %aking o" a re"erence shall not pre!ent the court "ro% deciding the clai% $e"ore it on %erits( /rocedure %or ma$ing com(laints: Sec 6!+7 ; < 4 co%plaint shall $e %ade on sole%n a""ir%ation or oath in writing addressed to the Banking -ohtasi$( #he co%plaint shall set out the "ull particulars o" the transaction co%plained o" and the na%e Copyright Virtual ni!ersity o" Pakistan 79
Banking Laws and Practices-BNK 601 VU and address o" the co%plainant( 3@8 Prior to %aking a co%plaint the co%plainant shall inti%ate in writing to the concerned $ank his intention o" "iling a co%plaint and i" the $ank either "ails to respond+ or %akes a reply which is unsatis"actory to the co%plaint+ within a period o" three %onths+ the co%plainant %ay "ile a co%plaint at any ti%e therea"ter within a "urther period o" three %onths 3?8 #he Banking -ohtasi$ %ay adopt any procedure as he considers appropriate "or in!estigating a co%plaint& Pro!ided that the shall not pass any order against a $ank without "irst gi!ing it a notice and an opportunity o" a hearing( 378 :u$Dect to section C@C+ the Banking -ohtasi$ shall not ha!e any power to issue an order in the nature o" a stay order or to entertain any co%plaints i" the %atter is pending $e"ore a court or other legal "oru%( 3B8 #he Banking -ohtasi$ %ay reDect a co%plaint su%%arily or he %ay accept the sa%e or pass any other order he dee%s "it& Pro!ided that in each case he shall pass a reasoned order "or his decision #he Banking -ohtasi$ shall hold o""ice a period o" three years and shall not $e eligi$le "or any e9tension o" tenure or "or re-appoint%ent under any circu%stances whatsoe!er( Banking -ohtasi$ shall not hold any other o""ice o" pro"it in the ser!ice o" Pakistan or occupy any other position carrying the right to re%uneration "or the rendering o" ser!ices( Recommendations %or im(lementations 6!+E ,n the e!ent the Banking -ohtasi$ co%es to the conclusion that the co%plain is Dusti"ied+ in part or in whole+ he shall try and "acilitate an a%ica$le resolution or settle%ent $y resort to %ediation and "ailing that co%%unicate his "indings to the concerned $ank with the directionN aC to reconsider the %atterJ to %odi"y or cancel the earlier decision+ action or "ailure to take the appropriate actionJ bC #o pay reasona$le co%pensation to the co%plainant as "i9ed $y the Banking -ohtasi$J cC #o take the re*uisite steps to i%pro!e the "unctioning or e""iciency o" the $ankJ and dC #o take such other re%edial steps or actions as %ay $e speci"ied $y the Banking -ohtasi$( #he Banking -ohtasi$ %ay+ in any case+ he dee%s "it or proper+ "orward a report to the :tate Bank reco%%endingN aC 4n in*uiry+ or the taking o" the re*uisite steps or legal proceedings against a $ank which has acted in !iolation o" $anking laws+ procedure+ regulations or directi!es o" the :tate BankJ and bC ,n the case o" a $ank in the pu$lic sector in cases o" $anking %alpractices or corruption+ nepotis% or gross and "lagrant dereliction $y $ank o""icers o" their duties and responsi$ilities+ the initiation o" such action including a cri%inal prosecution or disciplinary proceedings as the :tate Bank %ay dee% "it+ either $y itsel"+ or through "iling a report with the >o!ern%ent o" Pakistan( ,n no case whatsoe!er shall $e Banking -ohtasi$ ha!e the power to direct that loans+ ad!ances or "inances $e gi!en to a co%plainant( 378 4ny $ank+ or o""icial o" a $ank or a co%plainant aggrie!ed $y an order passed $y the Banking -ohtasi$ %ay "ile an appeal with the :tate Bank within thirty days which shall pass any order thereon it dee%s "it( 4ny order passed $y the Banking -ohtasi$ which has not $een appealed against+ or any order passed $y the :tate Bank in appeal+ as the case %ay $e+ shall $eco%e "inal and operati!e and i" not i%ple%ented shall render the $ank concerned to such action including the i%position o" a "ine or penalty as the :tate Bank %ay dee% "it+ and in relation to a $ank o""icer+ to the appropriate disciplinary or other proceedings( Nothing contained herein shall pre!ent a co%plainant "ro% "iling a suit against a $ank in the e!ent his co%plaint is reDected( /o'er to call %or in%ormation: Sec 6!+" #he Banking -ohtasi$ shall ha!e the power "or purposes o" disposing a case+ to re*uire a $ank to disclose to hi% any in"or%ation su$Dect to the "ollowing conditions&80 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU aC #he Banking -ohtasi$ shall %ake e!ery endea!or to ensure that $anking con"identiality is %aintained as re*uired $y $anking law and procedure and shall take no action which is !olatile thereo"( bC #he Banking -ohtasi$ %ay call "or any or all such docu%ents which are rele!ant or pertinent "or purposes o" deciding a co%plaint& --Pro!ided that he shall not $e entitled to call "or unrelated docu%ents or docu%ents which %ay co%pro%ise the $ankEs position in relation to other custo%ers& cC ,n the e!ent o" a $ank re"using to "urnish in"or%ation+ or copies o" rele!ant docu%ents+ the Banking -ohtasi$ shall not $e authori2ed to co%pel the $ank to co%ply with his order $ut he %ay draw an ad!erse in"erence and co%%ent on the sa%e in his "indings( T)e ban$ing com(anies rules, -.* -- #hese rules %ay $e called the Banking Co%panies ;ules+ 156?( -- #hey e9tend to the whole o" Pakistan( -- #hey shall co%e into "orce on such date as the /ederal >o!ern%ent %ay+ $y noti"ication in the o""icial >a2ette+ speci"y in this $ehal"( 7e%initions: JOrdinanceJ %eans the Banking Co%panies =rdinance+ 156@ 3LV,, o" 156@8& J/rinci(al o%%ice o% t)e State &an$ M %eans the o""ice o" the :tate Bank to which the returns re*uired under the =rdinance or these rules are to $e su$%ittedJ L/rinci(al o%%ice o% t)e ban$ing com(an#P %eans the o""ice o" the $anking co%pany which shall $e responsi$le "or the su$%ission o" returns under the =rdinance or these rules& LQuarterP %eans a period o" three %onths ending on the last day o" -arch+ Aune+ :epte%$er and 'ece%$er o" any year J and L/lace o% businessP o" a $anking co%pany includes any su$-o""ice+ pay-o""ice+ su$-pay-o""ice or any place o" $usiness at which deposits are recei!ed+ che*ues cashed or %oneys lent( 4ist o% O%%icers: Sec 1 4 $anking co%pany shall+ within one %onth o" the co%%ence%ent o" these rules or o" the co%%ence%ent o" its $usiness+ whiche!er is later+ send to the principal o""ice o" the :tate Bank a written state%ent containing a list o" L #he na%es+ the o""icial designations and speci%en signatures o" the o""icers authori2ed to sign on $ehal" o" the $anking co%pany returns re*uired under the =rdinance or these rulesJ and t )e names and addresses o" t)e directors o" the $anking co%pany( 4ny change in the list re"erred to in clause 3i8 shall $e inti%ated to the principal o""ice o" the :tate Bank within one %onth o" such change( 4 $anking co%pany incorporated outside Pakistan+ which at the co%%ence%ent o" these rules has a place o" $usiness in Pakistan+ and e!ery such co%pany which a"ter the co%%ence%ent o" these rules esta$lishes a place o" $usiness in Pakistan+ shall+ within one %onth o" the co%%ence%ent o" these rules or o" the esta$lish%ent o" such place o" $usiness+ as the case %ay $e+ "urnish to the principal o""ice o" the :tate Bank the "ull address o" the principal place o" $usiness declared in ter%s o" clause 3e8 o" su$section 318 o" :ection @66 o" the Co%panies 4ct+ 151? and the na%e and address o" one or %ore persons resident in Pakistan authori2ed to accept on $ehal" o" the co%pany any notice or order re*uired to $e ser!ed on the co%pany under the =rdinance or these rules and shall inti%ate the principal o""ice o" the :tate Bank any change in such na%e or address within one %onth o" such change& Pro!ided that in"or%ation "urnished $y a $anking co%pany under rule 7 o" the Banking Co%panies 3Control8 ;ules+ 1575+ shall $e dee%ed to ha!e $een "urnished under this rule( 2it)dra'als o% 7e(osits: Sec . #he principal o""ice o" the :tate Bank shall not $e $ound to return securities actually deposited+ $ut %ay su$stitute there"ore new scrip o" securities o" the sa%e description and a%ount( C)anges in de(osits: Sec 5 Copyright Virtual ni!ersity o" Pakistan 81
Banking Laws and Practices-BNK 601 VU #he o""ice o" the National Bank o" Pakistan holding securities under su$-rule 318 o" rule B shall per%it the withdrawal o" "oreign appro!ed securities only under instructions "ro% the principal o""ice o" the :tate Bank( <hen the "or% or a%ount o" deposit is changed $y reason o" a su$se*uent deposit or withdrawal+ the principal o""ice o" the :tate Bank o" Pakistan shall+ as soon as possi$le+ send to the principal o""ice o" the $anking co%pany a "resh certi"icate in /or% 1(U Maturing o% securit# de(osits: Sec 6 <hen a security in deposit %atures or when any yield on such a security ceases to accrue+ the principal o""ice o" the :tate Bank shall not $e $ound to in"or% the $anking co%panyJ $ut upon the receipt o" a re*uisition in writing "ro% the $anking co%pany+ the principal o""ice o" the :tate Bank shall+ as soon as possi$le+ collect the discharge !alue and hold the a%ount in deposit "or purposes o" su$-section 3?8 o" section 1? o" the =rdinance( ?nterest on de(osits: Sec No interest shall $e paya$le on cash deposits #he principal o""ice o" the :tate Bank shall credit+ as soon as possi$le+ the current account o" the $anking co%pany %aintained with it with the interest realised on securities su$Dect to the usual charges(U 4icensing o% ban$ing com(anies: Sec 8 4 co%pany desiring to ha!e a license under section @6 o" the =rdinance s)all a((l# to t)e 7irector, Banking Control 'epart%ent+ :tate Bank o" Pakistan+ Central 'irectorate+ Karachi( D ?n "orm ?V in the case o" a co%pany incorporated in Pakistan and desiring to co%%ence $anking $usinessJ ?n "orm V in the case o" a co%pany incorporated in Pakistan and in e9istence at the co%%ence%ent o" the =rdinanceJ ?n "orm V? in the case o" a co%pany incorporated outside Pakistan and desiring to co%%ence or carry on $anking $usiness in Pakistan( O(ening o% ne' (laces o% business: Sec 4n application $y a $anking co%pany "or per%ission to open a new place o" $usiness or change the location o" an e9isting place o" $usiness under :ection @C o" the =rdinance shall $e su$%itted in "or% V,, toL the 'irector+ Banking Control 'epart%ent+ :tate Bank o" Pakistan+ Central 'irectorate+ Karachi in the case o" $anking co%panies ha!ing their principal o""ices in <est Pakistan+ and the 'eputy Chie" =""icer+ Banking Control 'epart%entJ :tate Bank o" Pakistan+ 'acca+ in the case o" $anking co%panies ha!ing their principal o""ices in )ast Pakistan( 4ist o% o%%ices: Sec ! 4 $anking co%pany shall+ within a period o" one %onth "ro% the close o" e!ery *uarter+ send to the principal o""ice o" the :tate Bank a list in /or% V,,, o" all its o""ices in Pakistan at which it was doing $usiness during that *uarter( Manner o% (ublication o% accounts and balance+s)eet: Sec 1 #he $alance-sheet and pro"it and loss account prepared in ter%s o" :ection ?7 o" the =rdinance together with the auditorEs report shall $e pu$lished within a period o" si9 %onths "ro% the end o" the period to which they relate in a newspaper which is in circulation at the place where the $anking co%pany has its principal o""ice( EB(lanationCD/or the purposes o" this rule+ the e9pression FnewspaperG %eans any newspaper or Dournal pu$lished at least once a week+ $ut does not include a Dournal other than a $anking+ co%%ercial+ "inancial or econo%ic Dournal( 4ist o% 7ebtors: Sec 0 #he list o" de$tors under :ection 6? o" the =rdinance shall $e in /or% S,,, or as near thereto as circu%stances per%it( 82 Copyright Virtual ni!ersity o" Pakistan
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/o'er to eBem(t in certain cases: Sec . #he /ederal >o!ern%ent %ay+ on the reco%%endation o" the :tate Bank+ declare $y noti"ication in the =""icial >a2ette that any or all o" the pro!isions o" these rules shall not apply to any $anking co%pany or to any class o" $anking co%panies either generally or "or such period as %ay $e speci"ied(
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Banking Laws and Practices-BNK 601 STATE &AN> O" /A>?STAN ACT, -0.
VU LESSON 16
#his e9tends to the whole o" Pakistan( ,t shall co%e into "orce at once and e9cept :ection 76+ shall $e dee%ed to ha!e taken e""ect on and "ro% the twel"th day o" -ay+ 157C( ?n t)is Act 'e s)all cover t)e %ollo'ing as(ects9 statutor# (rovisions o 'e"initions o )sta$lish%ent and incorporation o" the Bank o :hare Capital >uarantee $y /ederal >o!ern%ent Notice o" #rust o ;egister o" shareholders o =""ices+ Branches and 4gencies o Central Board o" 'irectors o /unctions and responsi$ilities o" the Central Board o -onetary and "iscal policies $oard o )9ecuti!e Co%%ittee Quali"ications and dis*uali"ication o" 'irectors and -e%$ers o #er% o" o""ice o" 'irectors and -e%$ers o 'irectors and -e%$ers o >eneral and annual general %eeting o Business which :tate Bank %ay transact o ,ssue 'epart%ent o Cash ;eser!e o" :cheduled Banks to $e kept with the Bank o :cheduled Banks o Power to re*uire returns "ro% Corporations o Pu$lication o" consolidated state%ent $y the Bank o :u$%ission o" ;eturns $y :tate Bank o #he Bank and its o""icers to $e pu$lic o""icers o Li*uidation o" the Bank 7e%initions: the de"initions as contained in the 4ct are gi!en hereunder& JAnnual general meetingJ %eans the annual %eeting o" the shareholders-o" the BankJ JA((roved %oreign eBc)angeJ %eans currencies declared as such $y any noti"ication under :ec15J JT)e &an$J %eans the :tate Bank o" PakistanJ J&an$ NotesJ %eans notes %ade and issued $y the Bank in accordance with :ection @7 and include currency notes o" the >o!ern%ent o" Pakistan issued $y the BankJ LCentral &oardM %eans the Central Board o" 'irectors o" the BankJ JCo+o(erative &an$J %eans a society registered under the Co-operati!e :ocieties 4ct+ 151@+ or any other law "or the ti%e $eing in "orce in Pakistan relating to co- operati!e societies+ the pri%ary o$Dect o" which is to pro!ide "inancial acco%%odation to its %e%$ersJ J7ebenturesJ includes participation ter% certi"icatesJ J7irectorJ %eans a 'irector "or the ti%e $eing o" the Central BoardJ JGeneral meetingJ %eans the %eeting o" the share-holders H o" the Bank con!ened "or transacting such $usiness as %ay $e speci"ied in the notice con!ening the %eetingJ JGovernorJ and J7e(ut# GovernorsJ %eans respecti!ely the >o!ernor and 'eputy >o!ernors o" the BankJ J4oans and advancesJ includes "inances pro!ided on the $asis o" participation in pro"it and loss+ %ark up in price+ leasing+ hire-purchase o" otherwiseJ J4ocal &oardM %eans a Local Board o" -e%$ersJ JMemberJ %eans a -e%$er "or the Local BoardJ JRu(ee coinJ %eans one-rupee coin and one-rupee notes which are legal tender in PakistanJ 84 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 JSc)eduled ban$M %eans a $ank "or the ti%e $eing included in the list o" $anks su$-section 318 o" :ection ?6J JSecuritiesJ includes securities as de"ined in the Capital ,ssues 3Continuance o" 3SS,S o" 15768J JS)aresM includes %odara$a certi"icates(
VU %aintained under Control8 4ct+ 1576
Establis)ment and incor(oration o% t)e &an$: Sec *: 4s soon as %ay $e a"ter the co%%ence%ent o" this 4ct steps shall $e taken to esta$lish+ in accordance with the pro!isions o" this 4ct+ a $ank to $e called the :tate Bank o" Pakistan or Bank 'autat-ePakistan+ "or the purposes o" taking o!er+ as "ro% the "irst day o" Auly+ 157C+ the %anage%ent o" the currency "ro% the ;eser!e Bank o" ,ndia+ and carrying on the $usiness o" Central Banking( #he Bank shall $e a $ody corporate $y the na%e o" the :tate Bank o" Pakistan or Bank 'aulat-ePakistan+ ha!ing perpetual succession and a co%%on seal+ and shall $y the said na%e sue and $e sued( S)are Ca(ital: Sec 1 #he original share capital o" the Bank shall $e three corers o" rupees di!ided into three hundred thousand "ully paid-up shares o" the no%inal !alue o" one hundred rupees each+ out o" which not less than "i"ty one per cent shall $e held $y the /ederal >o!ern%ent and the $alance $y the pu$lic( #he share capital %ay $e increased $y a resolution o" the Central Board su$Dect to the appro!al o" the /ederal >o!ern%ent+ $ut not less than "i"ty-one per cent o" the additional share capital shall $e issued to the /ederal >o!ern%ent( #he no%inal !alue+ issue price+ the %anner in which the new shares %ay $e issued and allotted and their assign%ent to the registers o" shareholders %aintained under su$-section 318 o" :ection 6 shall+ su$Dect to the appro!al o" the /ederal >o!ern%ent+ $e deter%ined $y the Central Board Guarantee b# "ederal Government: Sec 0 Notwithstanding anything contained in the 4cts hereina"ter %entioned in this :ection+ the shares o" the Bank shall $e dee%ed to $e included a%ong the securities enu%erated in :ection @0 o" the #rusts 4ct+ 1CC@ and to $e appro!ed securities "or the purposes o" the ,nsurance 4ct+ 15?C and the Banking Co%panies =rdinance+ 156@ 3LV,, o" 156@8( O%%ices, &ranc)es and Agencies: Sec 6 #he head o""ice o" the Bank shall $e situated in Karachi( 18 #he Bank %ay esta$lish $ranches+ o""ices and agencies in Pakistan+ or+ with the prior appro!al o" the /ederal >o!ern%ent any-where outside Pakistan( @8 #he Bank shall create a special 4gricultural Credit 'epart%ent+ the "unctions o" which shall $e ?8 #o %aintain an e9pert sta"" to study all *uestions o" agricultural credit and $e a!aila$le "or consultation $y the /ederal >o!ern%ent+ Pro!incial >o!ern%ents+ Pro!incial Co-operati!e Banks and other $anking organi2ationsJ 78 #o co-ordinate the operations o" the Bank in connection with agricultural credit and its relations with the Pro!incial Co-operati!e Banks and any other organi2ations engaged in the $usiness o" agricultural credit( Central &oard o% 7irectors: Sec #he general superintendence and direction o" the a""airs and $usiness o" the Bank shall $e entrusted to the Central Board o" 'irectors which %ay e9ercise all the powers and do all acts and things that %ay $e e9ercised or done $y the Bank and are not $y this 4ct e9pressly directed or re*uired to $e done $y the Bank in general %eeting or in annual general %eeting( #he Central &oard shall consist o"aC #he >o!ernorJ bC :ecretary+ /inance 'i!ision+ >o!ern%ent o" PakistanJ and cC :e!en 'irectors+ including one 'irector "ro% each Pro!ince+ to $e no%inated $y the /ederal >o!ern%ent ensuring representation to agriculture+ $anking and industrial sectors( #he >o!ernor shall $e the chair%an o" the Central Board( Copyright Virtual ni!ersity o" Pakistan 85
Banking Laws and Practices-BNK 601 VU 4ll decisions o" the Central Board shall $e taken $y %aDority o" %e%$ers present and !oting and in the e!ent o" e*uality o" the !otes+ the >o!ernor %ay e9ercise a casting !ote "unctions and res(onsibilities o% t)e Central &oard: Sec -+A #he Central Board shall+ with a !iew to secure sta$ility o" %onetary syste%& ;egulate and super!ise %onetary and credit syste%& o o o o o Pro!ided that in regulating the %onetary and credit syste%+ the Central Board shall keep in !iew the National policy o$Decti!es o" the /ederal >o!ern%ent+ Pro!ided "urther that the >o!ernor %ay+ in any e%ergency which in his opinion re*uires i%%ediate action+ take %easures under this clause as %ay $e necessary in the circu%stances and shall+ in the ne9t %eeting o" the Central Board+ report to it "or appro!al o" such actionJ deter%ine+ in consultation with the /ederal >o!ern%ent+ the li%it o" credit to $e e9tended to the /ederal >o!ern%ent and Pro!incial >o!ern%ents tender ad!ice to the /ederal >o!ern%ent on %onetary policy and its interaction with "iscal and e9change rate policyJ 4naly2e and report periodically to the /ederal >o!ern%ent on the i%pact o" the policies $eing "ollowed on the state o" the econo%yJ and 'ischarge such other "unctions as %ay $e necessary "or regulating the %onetary syste% or as %ay $e assigned $y the /ederal >o!ern%ent(
Monetar# and "iscal /olicies Coordination &oard SecC -& i( /ederal -inister "or /inance Chair%an ii( /ederal -inister "or Co%%erce -e%$er iii( 'eputy Chair%an+ Planning Co%%ission -e%$er i!( #he >o!ernor -e%$er !( :ecretary+ /inance 'i!ision+ >o!t o" Pakistan -e%$er T)e &oard s)all+ a( Coordinate "iscal+ %onetary+ "oreign trade and e9change rate policiesJ $( )nsure consistency a%ongst %acro-econo%ic targets in the areas o" "iscal+ %onetary and e9ternal account aggregates and reco%%end adDust%ents "or the appro!al o" the /ederal >o!ern%entJ c( ;eco%%end %onetary aggregates and >o!ern%ent $orrowing "or consideration o" the National )cono%ic CouncilJ d( ;e!iew "iscal and %onetary %easures to secure %onetary aggregate targetsJ e( Consider li%its o" the go!ern%ent $orrowing as re!ised "ro% ti%e to ti%e in the %eetings to $e held $e"ore and a"ter passage o" the annual $udgetJ and "( ;e!iew the le!el o" >o!ern%ent $orrowing in relation to the predeter%ined or re!ised targets a"ter e!ery *uarterJ and g( ;e!iew the e9penditure incurred in connection with raising o" loans and >o!ern%ent $orrowing EBecutive Committee: Sec #here shall $e an )9ecuti!e Co%%ittee consisting o" the >o!ernor+ 'eputy >o!ernor+ i" any+ three 'irectors elected $y the Central Board to represent respecti!ely the areas speci"ied in the :chedule and an o""icer appointed $y the /ederal >o!ern%ent to act as -e%$er o" the )9ecuti!e Co%%ittee( )9cept when the Central Board is in session+ the )9ecuti!e Co%%ittee shall deal with and decide any %atter within the co%petence o" the Central Board( Local Boards+ their constitution and "unctions Quali%ications and dis:uali%ication o% 7irectors and Members: Sec * No person shall $e or shall continue to $e a 'irector or -e%$eraC <ho is a -e%$er o" the Central or Pro!incial 4egislatureJ or bC <ho is a salaried >o!ern%ent o""icialJ or 86 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU cC <ho is+ or at any ti%e has $een+ adDudicated an insol!ent or has suspended pay%ent or has co%pounded with his creditorsJ or dC <ho is "ound lunatic or $eco%es o" unsound %indJ or eC <ho is an o""icer or e%ployee o" any $ankJ or %C <ho is a 'irector o" any $ank other than the Bank+ $ut he shall not- $e dis*uali"ied or cease to $e a 'irector i" he is a 'irector o" a co-operati!e $ank( gC <ho is not+ within si9 %onths "ro% the date o" his $eco%ing a 'irector or -e%$er+ as the case %ay $e+ registered as a holder o" unencu%$ered shares o" the Bank o" the no%inal !alue o" "i!e hundred rupeesJ )C <ho a$sents hi%sel" "ro% three consecuti!e %eetings o" the Central Board+ or Local Board without lea!e "ro% the Central Board or Local Board as the case %ay $eR Nothing in clause 3$8 and 3g8 o" su$-section 318 shall apply to the >o!ern%ent o""icial no%inated as a 'irector $y the /ederal >o!ern%ent( #he /ederal >o!ern%ent shall sell shares at par to a 'irector or -e%$er no%inated $y it under :ection 5 and 1@+ seeking to o$tain the %ini%u% shares *uali"ication re*uired under this :ection+ $ut no such share shall $e disposed o" $y such 'irector or -e%$er otherwise than $y resale to the /ederal >o!ern%ent at par+ and the /ederal >o!ern%ent shall ha!e the right to order the trans"er at par o" all or any o" such shares to itsel"+ whereupon all or any o" such shares shall $e dee%ed to ha!e $een trans"erred to it( Term o% o%%ice o% 7irectors+and Members: Sec 1 #he elected 'irectors and -e%$ers shall hold o""ice "or three years on the e9piry o" which they shall cease to hold o""ice( 4 'irector or %e%$er shall not $e re%o!ed "ro% his o""ice $e"ore the co%pletion o" his tenure e9cept when he has done any act which is a $reach o" trust reposed in hi% or is guilty o" %isconduct& 'irectors and -e%$ers shall on the e9piry o" their ter% o" o""ice $e eligi$le "or re-election or reno%ination+ as the case %ay $e( Removal %rom and vacation o% o%%ice o% t)e Governor, 7e(ut# Governors, 7irectors and Members: Sec 0 :u$Dect to su$ section 3@8+ the /ederal >o!ern%ent %ay re%o!e the >o!ernor "ro% his o""ice+ i" he $eco%es per%anently incapa$le o" per"or%ing his duties+ or is su$Dect to any o" the dis*uali"ication speci"ied in su$-section 310 8 o" section 10+ or has done any act which is $reach o" the trust reposed in hi%+ or is guilty o" %isconduct& 4n elected 'irector or -e%$er shall not $e re%o!ed "ro% his o""ice e9cept upon a resolution passed $y the Central Board in that $ehal" $y in %aDority o" not less than si9 'irectors( aC #he >o!ernor+ a 'eputy >o!ernor or a 'irector %ay resign his o""ice $y state%ent to that e""ect in writing signed $y hi% and addressed to the /ederal >o!ern%ent( bC 4 state%ent o" resignation $y a 'eputy >o!ernor or 'irector shall $e addressed as a$o!e through the >o!ernor cC 4 -e%$er %ay resign his o""ice $y a state%ent to that e""ect in writing signed $y hi% and addressed Hto the Central Board( dC =n the acceptance o" such a resignation $y the /ederal >o!ern%ent or the Central Board+ as the case %ay $e+ the o""ice shall $eco%e !acant( 4ny 'irector or -e%$er !acating o""ice under this section shall not $e eligi$le to $eco%e a 'irector or -e%$er+ as the case %ay $e+ until the e9piry o" the ter% o" o""ice "or which he was no%inated or elected( ,n the e!ent o" a !acancy occurring a%ongst the no%inated 'irectors or -e%$ers+ the /ederal >o!ern%ent shall "ill the !acancy $y no%inating another 'irector or -e%$er+ as the case %ay $e( Copyright Virtual ni!ersity o" Pakistan 87
Banking Laws and Practices-BNK 601 VU ,n the e!ent o" a !acancy occurring a%ongst the elected 'irectors or -e%$ers $e"ore the e9piry o" their ter% o" o""ice+ a new 'irector or -e%$er+ as the case %ay $e+ shall $e elected "or the re%ainder o" the ter% $y and "ro% a%ongst the shareholders registered on the sa%e register as that "ro% which the !acating 'irector or -e%$er was elected( General and annual general meeting: Sec . #he annual general %eeting shall $e held annually at Karachi+ or a place in Pakistan where there is an o""ice or $ranch o" the Bank+ within three %onths "ro% the date on which the annual accounts o" the Bank are closed( ,n the said %eeting the shareholders present shall $e entitled to discuss the annual accounts+ the report o" the Central Board on the working o" the Bank throughout the year+ and the auditorsH report on the annual $alance sheet and accounts( 4 general %eeting %ay $e con!ened $y the Central Board at any other ti%e( )!ery share holder shall $e entitled to attend at any general %eetingJ and each shareholder who has $een registered on a register %aintained under :ection 6 "or a period o" not less than si9 %onths ending with the date o" the %eeting+ as holding "i!e or %ore shares shall ha!e one !ote+ and on a poll+ eachH shareholder so registered shall+ su$Dect to a %a9i%u% o" ten !otes+ ha!e one !ote "or each "i!e shares+ and such !otes %ay $e e9ercised either personally or $y pro9y &usiness ')ic) t)e &an$ ma# transact: Sec 5 ; < Bank is authori2ed to carry on and transact the se!eral $inds o% business )ereina%ter s(eci%ied, namel#&- #he acce(ting o" %oney on deposit "ro%+ and the collection o" %oney "or the /ederal >o!ern%ent+ the Pro!incial >o!ern%ents+ Local 4uthorities+ $ank and other persons& pro!ided that no interest shall $e paid on deposits recei!ed "ro% the /ederal >o!ern%ent+ a Pro!incial >o!ern%ent+ or a Local 4uthorityJ ;!< 3a8 #he purchase+ sale and rediscount o" $ills o" e9change and pro%issory notes drawn on and paya$le in Pakistan and arising out o" $ona"ide co%%ercial or trade transactions $earing two or %ore good signatures one o" which shall $e that o" a scheduled $ank+ and %aturing within one hundred and eighty days "ro% the date o" such purchase or rediscount+ e9clusi!e o" days o" graceJ 3$8 #he purchase+ sale and rediscount o" $ills o" e9change and pro%issory notes+ drawn on and paya$le in Pakistan and $earing two or %ore good signatures one o" which shall $e that o" a scheduled $ank and drawn or issued "or the purpose o" "inancing seasonal agricultural operation or the %arketing o" crops+ and %aturing within "i"teen %onths "ro% the date o" such purchase or rediscount e9clusi!e o" days o" graceJ ;*< #he purchase and the sale o" appro!ed "oreign e9changeJ 3$8 #he purchase+ sale and rediscount o" $ills o" e9change including treasury $ills+ drawn in or on any place in countries whose currency has $een declared as appro!ed "oreign e9change and %aturing within one hundred and eighty days "ro% the date o" purchase+ pro!ided that no such purchase+ sale or rediscount shall $e %ade in Pakistan e9cept with a scheduled $ankJ ;1< #he %aking to Local 4uthorities+ scheduled $anks or co-operati!e $anks o" ad!ances and loans repaya$le on de%and or on e9piry o" "i9ed periods not e9ceeding one hundred and eighty days against the security o"& stocks+ "unds and securities+ other than i%%o!a$le property+ in which a trustee is authori2ed to in!est trust %oney $y any law "or the ti%e $eing in "orce in PakistanJ ;0< #he %aking to the /ederal >o!ern%ent or Pro!incial >o!ern%ents o" ad!ances repaya$le in each case not later than three %onths "ro% the date o" the %aking o" the ad!anceJ ;.< #he %aking to institutions or $anks+ specially esta$lished "or the purpose o" pro%oting agricultural or industrial de!elop%ent+ or "or the "inancing o" construction o" houses+ in the country or co-operati!e $anks o" ad!ances and loans "or such a%ounts and on such ter%s and conditions ;5< the issue and purchase o" telegraphic trans"ers+ de%and dra"ts and other kinds o" re%ittances %ade paya$le at its own $ranches+ o""ices or agenciesJ 88 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU ; 8< 3a8#he purchase and sale o" securities o" the /ederal >o!ern%ent or a Pro!incial >o!ern%ent o" any %aturity or o" such securities o" a Local 4uthority as %ay $e speci"ied in this $ehal" $y the /ederal >o!ern%ent $y noti"ication in the =""icial >a2ette on the reco%%endation o" the central BoardJ ; !< #he sale and reali2ation o" all property+ whether %o!a$le or i%%o!a$le which %ay in any way co%e into the possession o" the Bank in satis"action+ or part satis"action o" any o" its clai%sJ ; *< #he acting as agent to /ederal >o!ern%ent+ any Pro!incial >o!ern%ent+ or any Local 4uthority in the transaction o" any o" the "ollowing kinds o" $usiness+ na%ely&;a<C the purchase and sale o" gold or sil!er or appro!ed "oreign e9changeJ ;b<C the purchase+ sale+ trans"er and custody o" $ills o" e9change+ securities or shares in any co%panyJ ;c<C the collection o" the proceeds+ whether principal or interest+ pro"it+ di!idend or other return+ o" any securitiesJ ;d<C the re%ittance o" such proceeds at the risk o" the principal+ $y $ills o" e9change paya$le either in Pakistan or elsewhereJ ;e<C the %anage%ent o" pu$lic de$tJ and ;%<C the transacting o" special drawing rights with the ,nternational -onetary /undJ ; 5< #he %aking and issue o" $ank notes su$Dect to the pro-!isions o" this 4ctJ ; 6< #he e9ercise o" powers and the per"or%ance o" "unctions and duties entrusted to the Bank $y or under this 4ct or any other law "or the ti%e $eing in "orceJ ; 6A< #he entering into clearing and pay%ents arrange%ents with any country or group o" countries+ on a general or regional or su$-regional $asis+ participation in the "or%ation and settle%ent o" international pay%ents transactions under such arrange%ents+ and incurring "inancial and other o$ligations relating theretoJ ; -< )sta$lish credits and gi!e guaranteesJ and ;!8< >enerally+ the doing o" all such %atters and things as %ay $e necessary+ incidental to or conse*uential upon the e9ercise o" its powers or the discharge o" its duties or "unctions under this 4ct( ?ssue 7e(artment: Sec !. #he issue o" Bank Notes shall $e conducted $y the Bank in an ,ssue 'epart%ent which shall $e separated and kept wholly distinct "ro% the Banking 'epart%ent and the assets o" the ,ssue 'epart%ent shall not $e su$Dect to any lia$ility other than the lia$ilities o" the ,ssue 'epart%ent as hereina"ter de"ined in :ection ?@( Cas) Reserve o% Sc)eduled &an$s to be $e(t 'it) t)e &an$: Sec *. )!ery scheduled $ank shall %aintain with the Bank a $alance the a%ount o" which shall not at the close o" $usiness on any day $e less than such percentage o" de%and lia$ilities and that o" the ti%e lia$ilities o" such $ank in Pakistan as %ay $e deter%ined $y the :tate Bank( Sc)eduled &an$s: Sec *5 ; < #he Bank shall %aintain at all its o""ices and $ranches an up-to-date list o" $anks declared $y it to $e scheduled $anks under Clause 3a8 o" su$-section 3@8( ;!< #he Bank shall+ $y noti"ication+ in the o""icial >a2ette 3a8 'eclare any $ank to $e scheduled $ank which is carrying on the $usiness o" $anking in Pakistan and which3i8 is a $anking co%pany as de"ined in :ection @@6/ o" the Co%panies 4ct+ 151?+ or a Co-operati!e $ank+ or a corporation or a co%pany incorporated $y or esta$lished under any law in "orce in any place in or outside PakistanJ 3ii8 has a paid-up capital and reser!es o" an aggregate !alue o" not less than "i!e lakhs o" rupees& Pro!ided that in the case o" a co-operati!e $ank+ an e9ception %ay $e %ade $y the BankJ 3iii8 satis"ies the Bank that its a""airs are not $eing conducted in a %anner detri%ental to the interests o" its depositorsJ Copyright Virtual ni!ersity o" Pakistan 89
Banking Laws and Practices-BNK 601 VU 3iii8 satis"ies the Bank that its a""airs are not $eing conducted in a %anner detri%ental to the interests o" its depositorsJ /o'er to re:uire returns %rom Cor(orations: Sec *6 #he Bank %ay re*uire any Corporation with which it has any transactions under :ection 16 to "urnish returns re"erred to in under su$ section 3?8 o" :ection ?6+ and i" it does so re*uire+ the pro!isions o" su$:ection( 368+ 368 and 3C8 o" :ection ?6 shall apply+ so "ar as %ay $e+ to such Corporation as i" it were a scheduled $ank( /ublication o% consolidated statement b# t)e &an$: Sec *#he Bank shall co%pile and pu$lish in such %anner and at such ti%es as the /ederal >o!ern%ent %ay direct+ a consolidated state%ent "ro% such in"or%ation as %ay $e recei!ed under this 4ct( ;eturns Submission o% Returns b# State &an$: Section 18 ; < #he Bank shall prepare and trans%it to the /ederal >o!ern%ent a weekly account o" the ,ssue 'epart%ent and o" the Banking 'epart%ent in such "or% as the /ederal >o!ern%ent %ay+ $y noti"ication in the o""icial >a2ette direct( #he /ederal >o!ern%ent shall cause these accounts to $e pu$lished weekly in the o""icial >a2ette( ;!< #he Bank shall also+ within "our %onths "ro% the date on which the annual accounts o" the Bank are closed+ release to the pu$lic and si%ultaneously trans%it to the /ederal >o!ern%ent a copy o" the annual accounts signed $y the >o!ernor+ the 'eputy >o!ernor+ i" any+ and the Chie" 4ccounting =""icer o"H the Bank+ and certi"ied $y the 4uditors together with a report $y the Central Board on the working o" the Bank throughout the year+ and the /ederal >o!ern%ent shall cause such accounts and report to $e pu$lished in the o""icial >a2ette( ;*< #he Bank shall also+ within two %onths "ro% the date on which the annual accounts o" the Bank are closed+ trans%it to the /ederal >o!ern%ent a state%ent showing the na%e+ address and occupation o"+ and the nu%$er o" shares held $y each shareholder o" the Bank( #he Bank and its o""icers to $e pu$lic o""icers& Section 1.: ; < /or the purposes o" :ection 1@7 o" the )!idence 4ct+ 1C6@+ the pro!isions o" Part ,V o" the Code o" Ci!il Procedure+ 150C -and the pro!isions o" rule @6 o" =rder V+ and rule B@ o" =rder SS, o" the said Code+ the Bank and any person in the ser!ice o" the Bank acting in his capacity as such shall $e dee%ed to $e pu$lic o""icer( ;!< #he pro!isions o" :ection 1@? o" the )!idence 4ct shall apply to the unpu$lished records o" the Bank and the >o!ernor shall $e dee%ed to $e the o""icer or head o" the depart%ent concerned( ;*< )!ery person in the ser!ice o" the Bank shall $e dee%ed to $e a pu$lic ser!ant within the %eaning o" section @1 o" the Pakistan Penal Code 34ct SLV o" 1C608 /roduction o% un(ublis)ed record o% ban$, etc: Sec 1.+A ; < No court tri$unal or other authority shall $e entitled to co%pel the $ank or any person in the ser!ice o" the $ank to produce or+ as the case %ay $e+ gi!e any e!idence deri!ed "ro%+ any unpu$lished record o" the $ank ;!< No court+ tri$unal or other authority shall per%it any one to produce or gi!e e!idence deri!ed "ro%+ any unpu$lished record o" the $ank+ e9cept with the prior per%ission in writing o" the >o!ernor who %ay gi!e or withhold such per%ission as he thinks "it( ;*< Notwithstanding anything contained in this 4ct or any other law "or the ti%e $eing in "orceH+ a report prepared $y the Bank on a $anking co%pany under :ection 70 o" the Banking Co%panies =rdinance+ 156@ 3LV,, o" 156@8+ shall $e dee%ed to $e unpu$lished "or the purposes o" su$sections 318 and 3@8 e!en i" a copy o" such report has $een supplied to the $anking co%pany to which the report pertains or to the /ederal >o!ern%ent or to the Pakistan Banking Council constituted under :ection 5 o" the Banks 3Nationali2ation8 4ct+ 1567( 90 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU ?nconsistent orders not to be issued: Sec 1.+& No go!ern%ental or *uasi-go!ern%ental $ody or agency shall issue any directi!e+ directly or indirectly+ to any $anking co%pany or any other "inancial institution regulated $y the Bank which is inconsistent with the policies+ regulations and directi!ities issued $y the Bank pursuant to this 4ct+ the Banking Co%panies =rdinance+ 156@ 3LV,, o" 156@8 or any other law in "orce( 4i:uidation o% t)e &an$: Sec 08 #he Bank shall not $e placed in li*uidation sa!e $y order o" the /ederal >o!ern%ent and in such %anner and on such ter%s and conditions as it %ay direct( "rom t)e above 'e understand t)at State &an$ o% /a$istan eBercises various (o'ers as 'ell as certain duties and obligations are entrusted on t)e &an$ b# virtue o% Statutor# /rovisions contained in t)is ActC
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VU LESSON 17
S&/ &AN>?NG SERV?CES COR/ORAT?ON OR7?NANCE, !88 #his =rdinance e9tends to the whole o" Pakistan( Central Banks all o!er the world are re*uired to discharge an i%portant o$ligation as regulator and policy %aker as well as ad!isor to the >o!ern%entJ as such it is not ad!isa$le that Central Bank should engage the%sel!es into day to day a""airs o" the Banking( 4s such it was decided that a corporation %ay $e esta$lished "or discharging !arious "unctions which are contained in this =rdinance+ so that the :tate Bank o" Pakistan %ay "ocus its attention towards its pri%e o$Decti!es( ?n t)is Ordinance 'e s)all es(eciall# %ocus on t)e %ollo'ing as(ects9 statutor# (rovisions: 'e"initions )sta$lish%ent and incorporation o" the Bank Bank to $e a su$sidiary o" the :tate Bank Business and "unctions o" the Bank Board o" 'irectors -anaging 'irector o" the Bank 4ccounts and audit Li*uidation o" the Bank #rans"er o" undertaking to the Bank Pro!isions with respect to e%ployees trans"erred to the $ank 'elegation o" the powers o" the :tate Bank to :BP Banking :er!ices Corporation 'uty o" o""icers and ser!ants to %aintain secrecy 7e%initions: the de"initions as contained in the =rdinance are gi!en hereunder& JActJ %eans the :tate Bank o" Pakistan 4ct+ 15B6( J&an$J %eans the :BP Banking :er!ices Corporation esta$lished under section ?J J&oardJ %eans the Board o" 'irectors o" the BankJ JC)airmanM %eans the Chair%an o" the BoardJ JCommittee o% 7irectorsM %eans a Co%%ittee o" 'irectors constituted under section 11J J7irectorJ %eans a %e%$er o" the BoardJ MGovernorJ %eans the >o!ernor and includes an 4cting >o!ernor o" the :tate Bank appointed under the 4ctJ JManaging 7irectorJ %eans the -anaging 'irector appointed under section 5J JRegulationsM %eans regulations %ade under this =rdinanceJ JRulesJ %eans rules %ade under this =rdinanceJ JSealJ %eans the co%%on seal o" the BankJ MState &an$J %eans the :tate Bank o" Pakistan esta$lished under the 4ctJ JTrans%er 7ateJ %eans the date speci"ied in the #rans"er =rderJ MTrans%er OrderM %eans #rans"er =rder %ade under su$-section 318 o" section 1BJTrans%erred Em(lo#eesM %eans the e%ployees o" the :tate Bank who shall+ as "ro% the #rans"er 'ate+ stand trans"erred to and $eco%e the e%ployees o" the Bank+ $y !irtue o" the #rans"er =rderJ and MTrans%erred Underta$ingM %eans a part o" the undertaking o" the :tate Bank speci"ied in su$-section 318 o" section 1B( Establis)ment and incor(oration o% t)e &an$: Sec *: 318 4s "ro% the date o" pro%ulgation o" this =rdinance+ there shall $e esta$lished+ a $ank to $e called :BP Banking :er!ices Corporation( 3@8 ,t is worth %entioning that where!er the word $ank is used in this =rdinance that would in!aria$ly %ean :BP Banking :er!ices Corporation( 92 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU 3?8 #he Bank shall $e a $ody corporate ha!ing perpetual succession and a seal and shall+ $y the na%e assigned to it $y su$-section 318+ sue and $e sued( 378 #he head o""ice o" the Bank shall $e situated in Karachi and it %ay esta$lish $ranches+ o""ices and agencies in Pakistan and anywhere outside Pakistan with the prior appro!al+ in writing o" the :tate Bank( &an$ to be a subsidiar# o% t)e State &an$: Sec 1 #he Bank shall $e a su$sidiary o" the :tate Bank+ and the :tate Bank shall e9ercise control o!er the Bank in accordance with the pro!ision o" this =rdinance &usiness and %unctions o% t)e &an$: Sec 0& 318 :u$Dect to su$-section 3@8+ the Bank+ under the o!erall super!ision and control o" the :tate Bank+ %ay transact and carry on all or any o" the "ollowing "unctions na%ely&N ;a<C #he carrying on o" the #rans"erred ndertaking+ statutory and ad%inistrati!e "unctions and acti!ities o" the :tate Bank trans"erred or delegated $y the :tate Bank to the Bank under this =rdinanceJ ;b<C #he handling o" receipt+ supply and e9change o" Bank notes and coins which are legal tenderJ ;c<C #he issue+ supply+ sale+ encash%ent and handling o" pri2e $onds+ holding draws thereo" and other sa!ings instru%ents o" the /ederal >o!ern%ent or o" a Pro!incial >o!ern%entJ ;d<C #he per"or%ance o" any other acti!ity or $usiness which the :tate Bank %ay+ $y order in writing+ speci"yJ and ;e<C #he carrying on o" any $usiness and discharging o" any "unctions and powers as are incidental to+ or in connection with+ the a""airs o" the Bank+ including+ without li%iting the generality o" the "oregoing and+ the power to enter into any contracts or other instru%ents or any "inancial or other transactions+ issue guarantees and inde%nities+ $orrow and lend %oneys+ accept deposits o" %oney+ %ake in!est%ents+ purchase and hold any property and assets+ and to pro!ide any ser!ices to the :tate Bank and to others (and recei!e any "ee+ co%%ission or other co%pensation "or such ser!ices( 3@8 #he :tate Bank shall not trans"er or delegate any o" the "unctions speci"ied in section 54 =" the 4ct+ including "or%ulation and %onitoring o" %onetary and credit policies+ regulation and super!isionJ o" the "inancial sector+ "oreign e9change regi%e and e9change-rate policy+ and pay%ent and settle%ent syste%( S)are ca(ital and limited liabilit#: Sec . #he authori2ed share capital o" the Bank shall $e one $illion rupees or such other a%ount the :tate Bank %ay+ "ro% ti%e to ti%e+ deter%ine $y order in writing and shall $e di!ided into shares o" one %illion rupees each( H#he paid-up capital o" the Bank shall $e such a%ount as %ay+ "ro% ti%e to ti%e+ $y order in writing $e deter%ined $y the :tate Bank and held inter alia, $y -it+ including the "ully paid-up shares issued to it under su$-section 368 o" section 1B( #he share capital %ay $e di!ided into di""erent kinds and classes therein asH %ay $e prescri$ed $y regulations( #he lia$ility o" shareholders o" the Bank shall $e li%ited to the a%ount+ i" any+ not "ully paid-up on the shares held $y the% in the capital o" the Bank(
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Banking Laws and Practices-BNK 601 VU &oard o% 7irectors: Sec 5: #he general superintendence+ direction and %anage%ent o" the a""airs and $usiness o" the Bank and o!erall policy %aking in respect o" its operations shall !est in the Board o" 'irectors which %ay e9ercise all such powers and do all such acts+ deeds and things that %ay $e e9ercised or done $y the Bank( ,n discharging its "unctions+ the Board shall ensure co%pliance with the orders and directions that %ay $e issued $y the :tate Bank "ro% ti%e to ti%e( T)e &oard s)all consist o%:+ a8 -e%$ers o" the Central Board o" the :tate BankJ and $8 #he -anaging 'irector( #he %eetings o" the Board shall $e held at such ti%es and places as %ay $e prescri$ed $y regulations or+ until so prescri$ed $y regulations+ as and when con!ened $y the Chair%an( No act or proceedings o" the Board shall $e in!alid %erely on the ground o" the e9istence o" any !acancy in+ or de"ect in the constitution o" the Board #he *uoru% o" %eetings o" the Board shall $e as %ay $e prescri$ed $y regulations or+ until so prescri$ed $y regulation+ shall $e "i!e 'irectors( 4ll decisions o" the Board shall $e taken $y %aDority o" the 'irectors present and !oting at a %eeting duly con!ened and held+ and in the e!ent o" an e*uality o" !otes+ the Chair%an %ay e9ercise a casting !ote( 4 resolution in writing signed $y all 'irectors shall $e as e""ecti!e as i" such resolution had $een passed at a %eeting o" the-Board C)airman: Sec 6 #he Governor shall $e the Chair%an o" the Bank( #he Chair%an shall+ whene!er present+ preside o!er %eetings o" the Board+ $ut i" at any %eeting the >o!ernor is not present+ a 'eputy >o!ernor o" the :tate Bank+ designated "or this purpose $y the >o!ernor+ shall attend the %eeting on $ehal" o" the >o!ernor and preside o!er such meeting pro!ided that i" the 'eputy >o!ernor $eing present+ is not willing to act+ or is also a$sent+ the 'irectors present shall choose one o" their %e%$er to $e the Chair%an o" such %eeting( Managing 7irector: Sec #he -anaging 'irector shall $e appointed $y the :tate Bank #he -anaging 'irector shall hold o""ice during the pleasure o" the :tate Bank( #he -anaging 'irector shall $e the chie" e9ecuti!e o""icer o" the Bank and shall+ su$Dect o" the control and direction o" the Board+ ad%inister the a""airs o" the Bank+ and shall ha!e such powers "or this purpose as are "ro% ti%e to ti%e delegated to hi% $y the Board( #he salary and other ter%s and conditions o" ser!ice o" the -anaging 'irector shall $e such as the Board %ay deter%ine( #he -anaging 'irector shall de!ote his whole ti%e and attention to the a""airs o" the Bank+ pro!ided that the -anaging 'irector %ay+ in addition to his duties as the -anaging 'irectors+ $e entrusted with such other duties "or such period as the :tate Bank %ay+ $y order in writing deter%ine( 7is:uali%ications o% t)e Managing 7irector: Sec 8 No person shall $e appointed or hold o""ice as -anaging 'irector&N aC <ho is a %e%$er o" the :enate+ National 4sse%$ly+ any Pro!incial 4sse%$ly+ or an elected %e%$er o" a local council or local $ody constituted under any law relating to local councils or local $odies( bC <ho is e%ployed in any capacity in the ser!ice o" the /ederal >o!ern%ent or o" a Pro!incial >o!ern%ent or holds any o""ice or position "or which any salary or other re%uneration is paya$le out o" pu$lic "unds( cC <ho is a director+ o""icer or e%ployee o" any other Bank or o" a "inancial institution or has an interest as a shareholder in any other $ank or "inancial institution& 94 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU dC Pro!ided that nothing in this clause shall apply where this -anaging 'irector is in the e%ploy%ent o" the :tate Bank or where the -anaging 'irector is+ in addition to holding the o""ice o" -anaging 'irector o" the Bank+ entrusted with additional duties under su$-section 3B8 o" section 5J eC <ho has $een con!icted o" ta9 e!asion under any law+ or has $een con!icted or proceedings are pending against hi% under section 71@ o" the Co%panies =rdinance+ M15C7 3SLV,, o" 15C78+ or section C? o" the Banking Co%panies =rdinance+ 156@ 3LV,, o" 156@8+ or has $een con!icted $y a Court o" law "or an o""ence in!ol!ing %oral turpitudeJ %C <ho is in de"ault o" pay%ents due "ro% hi% to any Bank+ "inancial institution+ cooperati!e society+ >o!ern%ent depart%entR >o!ern%ent controlled or %anaged co%pany or corporation and "or the purpose o" this clause+ de"ault in pay%ent $y the spouse+ dependent children+ and co%panies+ "ir%s and other $usiness concerns under the control or %anage%ent o" a person shall $e considered as the de"ault o" such personJ or gC <ho holds an o""ice in a political partyR Committees o% 7irectors: Sec #he Board %ay constitute one or %ore Co%%ittees consisting o" such nu%$er o" 'irectors as it %ay deter%ine( 3 @8 #he powers+ "unctions+ duties and other ter%s o" appoint%ent o" a Co%%ittee o" 'irectors shall $e such as the Board %ay deter%ine( #he %e%$ers o" a Co%%ittee o" 'irectors shall hold o""ice "or such period as the Board may deter%ine( #he %inutes o" e!ery %eeting o" a Co%%ittee o" 'irectors shall $e laid $e"ore the Board as its ne9t %eeting "ollowing the %eeting o" the Co%%ittee( :u$Dect to the general and any special directions o" the Board+ a Co%%ittee o" 'irectors shall deal with any %atter entrusted to it $y the Board 7elegation o% (o'ers and a((ointment o% attorne#s: Sec ! #he Board %ay+ "or the purpose o" ensuring s%ooth and e""icient "unctioning o" the Bank and "acilitating transactions o" its daily $usiness+ $y resolution+ delegate to the -anaging 'irector or any other e9ecuti!e o" the Bank+ su$Dect to such conditions and li%itations+ i" any+ as %ay $e speci"ied therein+ such o" its powers and duties under this =rdinance as it %ay dee% necessary #he Board %ay+ "ro% ti%e to ti%e+ $y resolution appoint any co%pany+ "ir% or person to $e the attorney o" the Bank "or such purposes and with such powers+ authorities and discretions+ not e9ceeding those !ested in or e9ercisa$le $y the Board under this =rdinance and "or such period and su$Dect to such conditions as the Board %ay think "it+ and any such resolution %ay contain such pro!isions "or the protection and con!enience o" persons dealing with any such attorney as the Board %ay think "it( Accounts and audit: Sec * #he accounting year o" the Bank shall co%%ence on the "irst day o" Auly and end on the thirtieth day o" Aune #he Bank shall %aintain proper accounts and other records to re"lect true and "air !iew o" its state o" a""airs and prepare annual state%ent o" accounts+ including the pro"it and loss account and $alance sheet( #he accounts o" the Bank shall $e audited $y one or %ore auditors who shall $e chartered accountants within the %eaning o" the Chartered 4ccountants =rdinance + 1561 3S o" 15618 to $e appointed $y the :tate Bank( )!ery auditor shall $e supplied with a copy o" the annual state%ent o" accounts and it shall $e the duty o" the auditor to e9a%ine the sa%e together with the accounts and !ouchers relating thereto+ and e!ery auditor shall ha!e a list deli!ered to hi% o" all $ooks kept $y the Bank and shall+ at all reasona$le ti%es+ ha!e access to $ooks+ accounts and other docu%ents o" the Bank and %ay e%ploy accountants or other persons to assist hi% in auditing such accounts and %ay+ in relation to such accounts+ e9a%ine the -anaging 'irector+ any 'irector and e9ecuti!e o" the Bank( #he auditors s)all submit a re(ort to t)e &oard and to t)e State &an$ regarding the annual state%ent o" accounts+ and in any such report they shall state whether in their opinion the state%ent o" Copyright Virtual ni!ersity o" Pakistan 95
Banking Laws and Practices-BNK 601 VU accounts is a "ull and "air state%ent o" accounts containing all necessary particulars and is properly drawn up so as to e9hi$it a true and correct !iew o" the state o" a""airs o" the Bank and+ in case they ha!e called "or any e9planation or in"or%ation "ro% the -anaging 'irector or the Board+ whether it has $een gi!en and whether it is satis"actory( #he Board %ay+ in addition to the audit under su$-sections 3?8 and 378+ cause to $e carried out internal audit o" the BankHs accounts and the internal auditorsH reports shall $e su$%itted to the Board( #he Board %ay+ in addition to the audit under su$-sections 3?8 and 378+ cause to $e carried out internal audit o" the BankHs accounts and the internal auditorsH reports shall $e su$%itted to the Board( 4i:uidation o% t)e &an$: Sec 1 #he Bank shall not $e placed in li*uidation sa!e $y order o" the :tate Bank and in such %anner and on such ter%s and conditions as the :tate Bank %ay direct( Trans%er o% underta$ing to t)e &an$: Sec 0 3l8 :u$Dect to the powers under section B+ the :tate Bank %ay direct+ $y #rans"er =rder and as particularly descri$ed in such =rder+ that i( #he operational "unctions and acti!ities o" :BP ii( 4ll related o""ices and depart%entsJ iii( 4ll related assets and lia$ilitiesJ and i!( Certain e%ployees o" the :tate Bank shall trans"er to and !est in the Bank as o" the #rans"er 'ate( =n the %aking o" the #rans"er =rder $y the :tate Bank under su$section318+ the #rans"erred ndertaking and the #rans"erred )%ployees shall stand trans"erred to and !est in the $ank as on the #rans"er 'ate and shall $e operated+ %anaged and regulated $y the Bank as the undertaking and e%ployees o" the Bank+ pro!ided that the rules and regulations o" the :tate Bank applica$le to the operation o" the #rans"erred ndertaking and to the e%ploy%ent o" the #rans"erred )%ployees as o" i%%ediately $e"ore the #rans"er 'ate shall continue to be applied $y the Bank unless altered $y the Board with the appro!al o" the :tate Bank /or the purposes o" su$-section 318+3a8 FassetsM include properties whether tangi$le or intangi$le+ rights+ $ene"its and )ntitle%ents o" e!ery description and nature 3other than i%%o!a$le property8 o" the :tate Bank and relating to+ as o" the #rans"er 'ate+ the operational "unctions and acti!ities o" the :tate Bank and to the related o""ices and depart%entsJ 3$8 F)%ployeesG %eans the e%ployees o" the :tate Bank as are speci"ied in the #rans"er =rderJ 3 c8 Mlia$ilitiesM include de$ts+ o$ligations+ co%%it%ents+ loans+ encu%$rances+ clai%s and charges o" e!ery description and nature+ actual or contingent o" the :tate Bank and related to+ as on the #rans"er 'ate+ the operational "unctions and acti!ities o" the :tate Bank and to the related o""ices and depart%entsJ ;*< /or the purposes o" su$-section 318+Jrelated o%%ices and de(artmentsJ include all "ield o""ices o" the :tate Bank and certain other o""ices and depart%ents+ in "ull or in part+ as are speci"ied in the #rans"er =rderJ JO(erational %unctions and activitiesM shall consist o" the "ollowing+ na%ely&N i( re!enue collecting and pay%ents "or and on $ehal" o" the /ederal >o!ern%ent+ a Pro!incial >o!ern%ent+ Local >o!ern%ents+ local $odies or any other go!ern%ental $ody+ authority+ institution+ co%pany or corporationJ %aintenance o" the accounts o" the /ederal >o!ern%ent+ a Pro!incial >o!ern%ent+ local go!ern%ents+ local $odies+ other go!ern%ental $odies+ authorities+ institutions+ co%panies+ corporations and o" other $anks and "inancial institutionsJ Copyright Virtual ni!ersity o" Pakistan
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Banking Laws and Practices-BNK 601 iii( =perational work relating to %anage%ent o" de$tJ i!( !( !i(
VU
!ii(
=perational work relating to "oreign e9changeJ Pri2e $onds and >o!ern%ent sa!ings sche%esJ cash and other $usiness as pro!ided "or in agree%ents $etween the :tate Bank and the /ederal >o!ern%ent and $etween the :tate Bank and the Pro!incial >o!ern%ents or in the 4ct+ the /oreign )9change ;egulation 4ct+ 1576 3V,, o" 15768+ the Banking Co%panies =rdinance+ 156@ 3LV,, o" 156@8+ the Pu$lic 'e$t y 4ct+ 1577 3SV,,, o" 15778+ the :ecurities 4ct+ 15@0 3S o" 15@08+ or in any other applica$le laws+ rules+ regulations+ orders and noti"ications %ade or issued there underJ and 4ny other $usiness+ o""ices or depart%ents+ and "unctions+ in "ull or to part+ as %ay $e set out in or authori2ed or delegated $y the #rans"er =rder(
3784s and a"ter the #rans"er 'ate+ the Bank shall undertake+ pay+ satis"y+ discharge+ per"or% and "ul"ill all de$ts+ lia$ilities+ contracts+ engage%ents+ co%%it%ents and o$ligations whatsoe!er+ o" the :tate Bank e9isting i%%ediately $e"ore the #rans"er 'ate and co%prised in or e9clusi!ely relating to the #rans"erred ndertaking+ and as on the #rans"er 'ate+ the :tate Bank shall stand released and discharged "ro% all such de$ts+ lia$ilities+ contracts+ co%%it%ents and o$ligations( 3B8 4ll agree%ents+ contracts+ deeds+ $onds+ securities+ powers-o"-attorneys+ grant o" instru%ents and other legal representations+ guarantees+ letters o" credit+ negotia$le instru%ents o" whate!er kind su$sisting or ha!ing e""ect as at i%%ediately $e"ore the #rans"er 'ate to which the[ :tate Bank %ay $e a party or which shall $e in "a!or o" the :tate Bank and which are co%pro%ised in the #rans"erred ndertaking or e9clusi!ely relate thereto shall $e o" "ull "orce and e""ect+ on the #rans"er 'ate+ against or in "a!or o" the Bank and $e en"orced or acted upon $y or against the Bank+ as i" instead o" the :tate Bank+ the Bank had $een a party thereto or as i" the sa%e had $een issued $y or in "a!or o" the Bank( 4ll suits+ appeals or other legal proceedings+ including ar$itration proceedings+ o" whatsoe!er nature $y+ or against+ the :tate Bank which e9clusi!ely relate to the #rans"erred ndertaking and which shall $e pending i%%ediately $e"ore the #rans"er 'ate in any Court+ #ri$unal+ other co%petent authority or $e"ore any ar$itrator shall $e continued e9clusi!e $y+ or against+ the Bank and the :tate Bank shall cease to $e a party to such suits+ appeals or other legal proceedings( ,n consideration o" the trans"er to the Bank o" the #rans"erred ndertaking under sub0section 318+ the Bank shall issue such nu%$er o" "ully paid-up shares in its share capital to the :tate Bank as shall $e speci"ied in the #rans"er =rder( Notwithstanding anything in the :ta%p 4ct+ 1C55 3,, o" 1C558 or any other law "or the ti%e $eing in "orce no sta%p duty+ registration or any other si%ilar ta9 or le!y shall $e paya$le under any law "or the ti%e $eing in "orce on or in relation to the !esting and trans"er %ade $y the #rans"er =rder #he :tate Bank %ay take all such "urther+ supple%ental+ incidental and conse*uential actions+ and steps as %ay $e necessary to gi!e "ull e""ect to the pro!isions o" this section( Em(lo#ees trans%erred to t)e &an$: Sec . l< #he #rans"er =rder shall speci"y $y category or $y na%e the e%ployees o" the :tate Bank who shall+ as "ro% the #rans"er 'ate+ stand trans"erred to+ and $eco%e the e%ployees o"+ the Bank $y !irtue o" the #rans"er =rder( 3@8 #he #rans"erred )%ployee shall not $e entitled to any co%pensation or any other pay%ents whatsoe!er as a conse*uence o" trans"er to the Bank( 3?8 #he e9isting ter%s and conditions o" ser!ice and the $ene"its to which the #rans"erred )%ployees are entitled to in the :tate Bank+ including pension+ gratuity+ pro!ident and $ene!olent "unds $ene"its and $ene"its o" the e9isting sta"" regulations shall $e assured to the #rans"erred )%ployees upon their trans"er to the Bank e9cept where altered with the consent o" the #rans"erred )%ployees 4s "ro% the #rans"er 'ate+ the $ene"its accrued to the #rans"erred )%ployees under the :tate BankHs pension+ gratuity+ pro!ident "und+ $ene!olent "und any other e%ployees $ene"it =" the :tate Bank shall $e trans"erred to si%ilar "unds and sche%es esta$lished $y the Bank and the #rans"erred )%ployees Copyright Virtual ni!ersity o" Pakistan 97
Banking Laws and Practices-BNK 601 VU shall $e dee%ed to ha!e $eco%e %e%$ers o"+ and $eco%e entitled to the $ene"its o"+ such "unds and sche%es o" the Bank( /or the purpose o" pay%ent (o" $ene"its to the #rans"erred )%ployees under the pension+ gratuity+ pro!ident and $ene!olent "unds and other e%ployees $ene"its sche%es o" the Bank+ the period o" e%ploy%ent o" the #rans"erred )%ployees under the :tate Bank shall count towards then-under -the Bank notwithstanding the date o" trans"er o" the #rans"erred )%ployees to the Bank( /o'er o% t)e State &an$ to give direction: Sec 5 <here the :tate Bank is satis"ied a( ,n the pu$lic interestJ or ( ( $( #o pre!ent the a""airs o" the Bank $eing conducted in a %anner detri%ental to the interests o" its custo%ers or in a %anner preDudicial to the interests o" the Bank or o" the :tate BankJ or to secure the proper %anage%ent o" the Bank generally+ ,t is necessary to issue directions to the Bank+ the :tate Bank %ay+ "ro% ti%e to ti%e+ issue such directions as it %ay dee% "it and the Bank shall $e $ound to co%ply with such directions( #he :tate Bank %ay+ on representation %ade to it+ or on its own %otion+ %odi"y or cancel any direction issued under su$-section 318 and in so %odi"ying or cancelling any such direction %ay i%pose such conditions as it thinks "it+ su$Dect to which the %odi"ications or shall ha!e e""ect( 7elegation o% t)e (o'ers o% t)e State &an$: Sec 6 #he :tate Bank %ay+ $y order in writing+ direct that all or any o" the :tate BankHs powers and "unctions under this =rdinance+ the 4ct+ the Banking Co%panies =rdinance+ 156@ + the /oreign )9change ;egulation( 4ct+ 1576 or under any other law+ rules+ regulations+ orders+ noti"ications or $ye-laws "or the ti%e $eing in "orce shall+ su$Dect to the pro!ision o" section B o" this =rdinance+ $e e9ercised $y the Bank+ as the :BP %ay+ "ro% ti%e to ti%e+ speci"y $y order in writing( + <here the >o!ernor or any other e9ecuti!e o" the :tate Bank authori2ed $y the (>o!ernor in this $ehal" has+ under su$-section 318+ directed that any o" the :tate BankHs powers or "unctions under any law+ rules+ regulations+ orders+ noti"ications or $ye-laws "or the ti%e $eing in "orce shall $e e9ercised or per"or%ed+ $y the Bank the &oard ma#+ $y resolution+ direct that any o" such powers and "unctions shall $e e9ercised+ or per"or%ed+ su$Dect to suc) limitations, restrictions or conditions+ i" any+ as the Board %ay+ "ro% ti%e to ti%e+ i%pose $y the -anaging 'irector or any other 'irector+ e9ecuti!e or other e%ployee o" the Bank speci"ied $y the Board A((ointments under section !*& o% t)e "oreign EBc)ange Regulation Act, -15: Sec Notwithstanding the pro!isions o" section @?B o" the /oreign )9change ;egulation 4ct+ 1576 the :tate Bank %ay+ $y order in writing+ authori2e in relation to any area speci"ied in such order any e9ecuti!e o" the Bank to act as the 'irector o" 4dDudication+ an 4dditional 'irector o" 4dDudication+ a Aoint 'irector o" 4dDudication+ a 'eputy 'irector o" 4dDudication 'irector o" 4dDudication "or the purposes o" section @?B thereo"( #he e9ecuti!es o" the :tate Bank currently acting as the 'irector o" 4dDudication+ the additional 'irector o" 4dDudication+ the Aoint 'irector o" 4dDudication+ the 'eputy 'irector o" 4dDudication+ 4nd the 4ssistant 'irector o" 4dDudication in respect o" any area and trans"erred to the Bank pursuant to the #rans"er =rder shall continue to hold such appoint%ents until re%o!ed $y the :tate Bank and shall $e dee%ed to ha!e $een appointed $y the /ederal >o!ern%ent "or the purposes o" :ection @?-B o" the /oreign )9change ;egulation 4ct+ 1576 3V,, o" 15768( 7ut# o% o%%icers and servants to maintain secrec#: Sec !8 )9cept in the per"or%ance o" his duties under this =rdinance+ e!ery e9ecuti!e or other e%ployee o" the Bank shall preser!e and aid in preser!ing secrecy with regard to all %atters relating to the a""airs o" the Bank and o" the :tate Bank co%ing to his knowledge and not pu$lished $y the Bank or $y the :tate Bank and with regard to all %atters relating to the "inancial or %onetary a""airs o" any Bank+ institution+ person+ $ody o" persons+ any >o!ern%ent or authority whether in Pakistan or outside Pakistan that %ay co%e to his knowledge in the per"or%ance o" his duties( 98 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU )!ery such e9ecuti!e or other e%ployee who co%%unicates any such %atter+ e9cept when re*uired $y law so to do+ or in the discharge o" his duties as such+ shall $e guilty o" an o""ence punisha$le with i%prison%ent o" either description "or a ter% which %ay e9tend to three years or with "ine which %ay e9tend to one hundred thousand rupeesJ or with $oth( No Court shall take cogni2ance o" any o""ence punisha$le under this section e9cept upon a co%plaint in writing $y a person authori2ed in this $ehal" $y the Board( &an$ and its o%%icers to be (ublic o%%icers: Sec ! /or the purposes o" 4rticle 6 o" the Qanun-e-:hahadat =rder+ 15C7 3P(=( No( 10 o" 15C78+ the pro!isions o" Part ,V -o" the Code o" Ci!il Procedure+ 150C 34ct V o" 150C8+ and the pro!isions o" rule @6 o" =rder V+ and rule B@ o" order SS, o" the said Code+ the Bank and any person in the ser!ice o" the Bank acting ate+ capacity as such shall $e dee%ed to $e a pu$lic o""icer( #he pro!isions o" 4rticle 6 o" the Qanun-e-:hahadat =rder+ 15C7 3P(=( No(( 10 o" 15C78+ shall apply to the unpu$lished records o" the Bank and the -anaging 'irector shall $e dee%ed to $e the o""icer or head o" the depart%ent concerned( /ersons in t)e service o% t)e &an$ to be (ublic servants: Sec !! )!ery person in the ser!ice o" the Bank shall $e dee%ed to $e a pu$lic ser!ant within the %eaning o" section @1 o" the Pakistan Penal Code 34ct SLV o" 1C608( /roduction o% un(ublis)ed records o% t)e &an$, etc: Sec !* No Court+ #ri$unal or other authority shall $e entitled to co%pel the Bank or any person in the ser!ice o" the Bank to produce or + as the case %ay $e+ gi!e any e!idence deri!ed "ro%+ any unpu$lished records o" the Bank No Court+ #ri$unal or other authority shall per%it any one to produce or gi!e e!idence deri!ed "ro%+ any unpu$lished records o" the Bank+ e9cept with the prior per%ission in writing o" the -anaging 'irector who %ay gi!e or withhold such per%ission as he thinks "it( Notwithstanding anything contained in this =rdinance or any other law "or the ti%e $eing in "orce+ a report prepared $y the Bank on a $anking co%pany under any law "or the ti%e $eing shall $e dee%ed to $e unpu$lished "or the purposes o" su$-sections 318 and 3@8 e!en i" la copy o" such report has $een supplied to the $anking co%pany to which the report pertains+ the :tate Bank or the /ederal >o!ern%ent( /ension o% &an$ em(lo#ees to be eBem(t %rom attac)ments, etc Sec !1 Notwithstanding anything contained in any law "or the ti%e $eing in "orce+ pensions granted $y the Bank to its e9ecuti!es and other e%ployees shall not $e lia$le to sei2ure+ attach%ent or se*uestration $y process o" any court at the instance o" a creditor+ "or any de%and against the pensioner or in satis"action o" a decree or order o" any such Court EBem(tion %rom taBes: Sec !0 Notwithstanding anything contained in the <ealth #a9 4ct+ 156? 3SV o" 156?8+ and the ,nco%e #a9 =rdinance+ 1565 3SSS, o" 15658 or any other law "or the ti%e $eing in "orce relating to wealth ta9+ inco%e ta9 or super ta9+ the Bank shall not $e lia$le to pay any wealth ta9+ inco%e ta9 or super ta9 on its inco%e or wealth( /o'er to ma$e rules: Sec !. #he :tate Bank %ay+ $y noti"ication in the o""icial >a2ette+ %ake rules+ consistent with the pro!ision o" this =rdinance+ "or carrying out the purposes o" this =rdinance /o'er to ma$e regulations: Sec !5
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Banking Laws and Practices-BNK 601 VU #he Bank %ay+ su$Dect to the prior appro!al o" the :tate Bank+ %ake regulations+ not inconsistent with the pro!isions o" this =rdinance and the rules %ade there under+ to pro!ide "or all %atters "or which pro!ision is necessary or con!enient "or the purpose o" gi!ing e""ect to the pro!isions o" this =rdinance( <here any pro!ision o" the regulations is inconsistent with any pro!ision o" the-rules+ the pro!ision o" the rules shall pre!ail( <here the :tate Bank considers it e9pedient so to do+ it %ay $y order in writing+ direct the Bank to %ake any regulations or to a%end or rescind any regulations already %ade+ within such period as it %ay speci"y in this $ehal"( ," the Bank "ails or neglects to co%ply with any direction o" the :tate Bank under su$section 3?8 within the speci"ied period+ the :tate Bank %ay %ake+ a%end or rescind any regulation directed $y the :tate Bank to $e %ade+ a%ended or rescinded+ and a regulation so %ade+ a%ended or rescinded $y the :tate Bank shall $e dee%ed to ha!e $een %ade+ a%ended or rescinded $y the Bank in accordance with the pro!isions o" this section and shall ha!e e""ect accordingly( /rotection o% action ta$en in good %ait): Sec !6 No suit or other legal proceedings shall lie against the :tate Bank or any director or o""icer o" the :tate Bank "or anything which is in good "aith done or intended to $e done in pursuance o" this =rdinance or o" any rules+ regulations or orders %ade there under Ordinance to override, etc: Sec !)9cept the application o" any pro!ision o" the 4ct to the Bank as a su$sidiary o" the :tate Bank+ this =rdinance shall ha!e e""ect notwithstanding any thing contained in any law "or the ti%e $eing in "orce or in any agree%ent+ contract+ or other applica$le docu%ent or instru%ent( #he Banking Co%panies =rdinance+ 156@ 3L V,, o" 156@8+ shall not apply to the Bank( Removal o% di%%iculties: Sec *8 ?% any di""iculty arises in gi!ing e""ect to 0 pro!isions o" this =rdinance+ the :tate Bank %ay %ake such order not inconsistent with the pro!isions o" this =rdinance+ as %ay appear to it to $e necessary "or the purposes+ o" re%o!ing the di""iculty& Pro!ided that no such power shall $e e9ercised a"ter the e9piry o" two years "ro% the co%%ence%ent o" this =rdinance ?t is 'ort) mentioning t)at 'it) t)e establis)ment o% S&/ &an$ing Services Cor(oration, t)e Central &an$ is disc)arging its time %unctions in a more e%%icient and e%%ective mannerC
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VU LESSON 18
/A>?STAN &AN>?NG AN7 "?NANCE SERV?CES COMM?SS?ON ACT, --! TAE CO+O/ERAT?VE SOC?ET?ES AN7 CO+O/ERAT?VE &AN>S ;RE/A=MENT O" 4OANS< OR7?NANCE, -.. Establis)ment o% "ederal &an$ %or Co+O(erative and regulation o% Co+O(erative &an$ing Act, -55 "ederal &an$ %or Co+O(erative and Regulation o% Co+O(erative &an$ing ;Account< Rules /A>?STAN &AN>?NG AN7 "?NANCE SERV?CES COMM?SS?ON ACT, --! Object: #he o$Dect and purpose o" esta$lish%ent o" the co%%ission was to pro%ote %erit and transparency in recruit%ent o" $ank o""icers through co%petiti!e e9a%ination and inter!iew as well as conducting test "or pro%otion+ ad!ice /ederal >o!ern%ent on %atters relating to re*uisite *uali"ications+ %ethods o" recruit%ent in o""icer grade-@ 3=>-@8 and higher grades in "inancial institutions( #he co%%ission was re*uired to su$%it annual report to the President o" Pakistan( ?n t)is Act 'e s)all cover t)e %ollo'ing as(ects9 statutor# (rovisions: 'e"initions )sta$lish%ent o" the Co%%ission :alary+ allowances and pri!ileges #er% o" o""ice ;esignation and "illing o" !acancies /unctions o" the Co%%ission ;ecruit%ent to posts in /inancial ,nstitutions /unds o" the Co%%ission& 4ppoint%ent o" o""icers+ e%ployees+ etc ;eport o" the Co%%ission Power to a%end :chedule 4ct to o!erride other laws Power to %ake rules 7e%initions: the de"initions as contained in the 4ct are gi!en hereunder& FCo%%issionG %eans the Pakistan Banking and /inance :er!ices Co%%ission esta$lished under section ?J M/inancial institutionM %eans an institution re"erred to in the :cheduleJ M-e%$erM %eans a %e%$er o" the Co%%issionJ M;ecruit%entM %eans initial appoint%ent otherwise than $y pro%otion or trans"erJ M;ulesM %eans rules %ade under section 17J and 3"8MscheduleM %eans the schedule to this 4ct( Establis)ment o% t)e Commission: Sec * #here shall $e esta$lished "or the purposes o" this 4ct a co%%ission to $e called the Pakistan Banking and /inance :er!ices Co%%ission and consisting o" a Chair%an and not %ore than "our %e%$ers appointed $y the /ederal >o!ern%ent( Salar#, allo'ances and (rivileges: Sec 1 #he Chair%an and the -e%$ers shall $e entitled to such salary+ allowances and pri!ileges as the /ederal >o!ern%ent %ay deter%ine "ro% ti%e to ti%e Term o% o%%ice: Sec 0 #he Chair%an and -e%$ers shall hold o""ice "or such ter% as %ay $e deter%ined $y the /ederal >o!ern%ent Copyright Virtual ni!ersity o" Pakistan 101
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Resignation and %illing o% vacancies: Sec . #he Chair%an or a -e%$er %ay+ $y state%ent under his hand addressed to the /ederal >o!ern%ent+ resign his o""ice( 4ny !acancy occurring in the %e%$ership o" the Co%%ission due to death+ resignation or re%o!al shall $e "illed $y the appoint%ent o" another person $y the /ederal >o!ern%ent( "unctions o% t)e Commission: Sec 5 #he "unctions o" the Co%%ission shall $eN to conduct open co%petiti!e e9a%inations "or recruit%ent to >rade ,,, or higher posts in the "inancial institutionsJ to conduct inter!iews and tests "or recruit%ent to posts in grades higher than >rade ,,,+ e9cept where such recruit%ent is e9cluded "ro% the pur!iew o" the Co%%ission $y the /ederal >o!ern%entJ to conduct tests %or (romotion o" e9isting e%ployees "ro% lower cadres to >rade ,,, and a$o!e+ i" so re*uired $y a "inancial institutionJ and to ad!ise the /ederal >o!ern%ent on %atters relating to *uali"ications "or+ and %ethods o" recruit%ent to+ posts in >rade ,, or higher grades in the "inancial institutions+ i" so re*uired $y the /ederal >o!ern%ent Recruitment to (osts in "inancial ?nstitutions: Sec 6: ;ecruit%ent to all posts in >rade iii or higher grades in a "inancial institution shall $e %ade on the ad!ice o" the Co%%ission& Pro!ided that the Co%%ission %ay+ on the direction o" the /ederal >o!ern%ent ad!ise any "inancial institution "or recruit%ent in any post or grade #he Co%%ission %ay e9e%pt any pro"essional or class o" pro"essionals+ like engineers+ lawyers and chartered accountants+ "ro% appearing in any written test or e9a%ination conducted $y the Co%%ission( 4 "inancial institution shall not disregard+ or act contrary to+ the ad!ice o" the Co%%ission without the prior appro!al o" the /ederal >o!ern%ent+ and where the /ederal >o!ern%ent grants such appro!al it shall record its reasons "or doing so( "unds o% t)e Commission: Sec #here shall $e constituted "or the Co%%ission a "und to which shall $e credited all su%s recei!ed under su$-section 3@8 and out o" which shall $e de"rayed all e9penditure incurred $y the Co%%ission+ including e9penditure on the e%olu%ents o" the Chair%an and %e%$ers and the o""icers+ e%ployees+ e9perts( 4nd consultants o" the Co%%ission )!ery "inancial institution shall %ake to the Co%%ission such pay%ents to de"ray its e9penses as the Co%%ission %ay+ with the appro!al o" the /ederal >o!ern%ent+ de%and A((ointment o% o%%icers, em(lo#ees, etc: Sec 8 /or the e""icient per"or%ance o" its "unctions+ the Co%%ission %ay appoint its o""icers+ e%ployees+ e9perts and consultants on such ter%s and conditions as %ay $e prescri$ed( Re(ort o% t)e Commission: Sec #he Co%%ission will su$%it to the President annually a report on the work done $y the Co%%ission( /o'er to amend Sc)edule: Sec ! #he /ederal >o!ern%ent %ay+ keeping in !iew the purposes o" this 4ct+ $y noti"ication in the o""icial >a2ette+ a%end the :chedule so as to add any entry thereto or o%it or %odi"y any entry therein( Act to override ot)er la's: Sec * The pro!isions o" this 4ct shall ha!e e""ect notwithstanding anything contained in any other law+ or in any instru%ent+ deed or other docu%ents relating to a "inancial institution( /o'er to ma$e rules: Sec 1 #he Co%%ission %ay+ with the appro!al o" the /ederal >o!ern%ent+ $y noti"ication in the o""icial >a2ette+ %ake rules+ "or carrying out the purposes o" this 4ct( 102 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU Since t)e scenario in t)e ban$ing sector )as undergone, trans%ormation and s)i%ted %rom governmental control and nationaliHation to a (rivatiHed sectorC Aence designing and im(lementing t)e recruitment (olicies o% t)e res(ected ban$s is no' t)e sole (rerogative o% t)e &oard o% 7irectors o% t)e res(ective &an$sC Aence t)e im(ortance o% t)is Ordinance is overs)ado'ed b# t)e ne' realitiesC T)e co+o(erative societies and co+o(erative ban$s ;re(a#ment o% loans< ordinance, -.. #his =rdinance e9tends to the whole o" the pro!ince o" the PunDa$+ e9cept the #ri$al 4reas( ,t shall co%e into "orce at once( #he concept o" co-operati!e and "or%ation o" Co-operati!e societies and Co-operati!e $ank appears to $e a priority area "or the go!ern%ents to support and pro!ide institutional "ra%ework to those persons and seg%ents o" the society which do not hold su""icient assets and collaterals to o""er to the $anks and "inancial institutions "or securing loans. ad!ances( ?n t)is Act 'e s)all cover t)e %ollo'ing as(ects9 statutor# (rovisions: 'e"initions ;epay%ent o" loans :upply o" in"or%ation to the ;egistrar :er!ice o" notice to the $orrowers 'eter%ination o" lia$ility when loan is not ad%itted :ecuring and repay%ent o" loans ;eco!ery o" loans ;estrictions on registration o" docu%ents& ;estrictions on alienations Power o" ;egistrar when %aking in*uiry Penalty Procedure Power to %ake rules Bar o" Aurisdiction 7e%initions: the de"initions as contained in the 4ct are gi!en hereunder& LActG %eans the Co-operati!e :ocieties 4ct+ 15@B 3:ind V,, o" 15@B8J FAssistant RegistrarG %eans an 4ssistant ;egistrar o" Co-operati!e :ocieties appointed or dee%ed to ha!e $een appointed under the 4ct to assist the ;egistrarJ L&enami loanG %eans a loan the real $ene"iciary or recipient whereo" a person other than the person is in whose na%e the loan is ad!anced or grantedJ F&orro'erG includes in case o" a $ena%i loan+ the real $ene"iciary or recipient o" the loanJ Lco+o(erative ban$P %eans a co-operati!e society esta$lished "or carrying on $anking $usiness and ha!ing as its principal o$Dect the "inancing o" other co-operati!e societies registered or dee%ed to $e registered under the 4ctJ Lco+o(erative societ#G %eans a society which ha!ing as its o$Dect the pro%otion o" econo%ic interest o" its %e%$ers in accordance with co-operati!e principles+ is registered or dee%ed to $e registered under the 4ctJ LGovernmentG %eans the Pro!incial >o!ern%ent o" the PunDa$ i( LloanP %eans a loan 3including Ta $ena%i loan orU any transaction which in the opinion o" the ;egistrar is in su$stance a loan8+ whether o" %oney or in kind+ which is not secured or is insu""iciently secured+ and taken "ro% a co-operati!e society $y any person+ whether a %e%$er o" such society or not+ or "ro% a co-operati!e $ank $y any person $ut not an 4gricultural Cooperati!e :ociety+ 'airy /ar%ing Co-operati!e :ociety or Poultry /ar%ing Cooperati!e :ociety ha!ing in each case a working capital not e9ceeding "i!e hundred thousand rupeesU+ and includes+N /inance as de"ined in the Banking #ri$unals =rdinance+ 15C7( Copyright Virtual ni!ersity o" Pakistan 103
ii(
Banking Laws and Practices-BNK 601 VU iii( 4ny a%ount which is due "ro% any such person to a co-operati!e society or a co-operati!e $ank+ whether taken as a loan or notJ i!( any a%ount due "ro% any such person to a co-operati!e society or a co-operati!e $ank under a decree passed $y a Ci!il Court or an award gi!en $y an ar$itrator or a decision o" the ;egistrar+ whether in e9ercise o" his original or appellate DurisdictionJ and any loan due "ro% any such person to a co-operati!e society or a co-operati!e $ank which is the su$Dect %atter o" any pending suit+ ar$itration proceedings+ appeal or re!ision+ whether under the 4ct or $e"ore any Court(
!(
ExplanationN 4 loan is Finsu""iciently securedG i" it is not secured $y %ortgage+ pledge+ hypothecation or assign%ent o" such property o" the $orrower or o" his surety or o" $oth+ as in the case o" a loan not e9ceeding %ive hundred thousandU rupees+ the 4ssistant ;egistrar+ and in the case a loan e9ceeding %ive hundred thousandU rupees+ the ;egistrar %ay think ade*uateJ LRegistrarP %eans a ;egistrar o" Co-operati!e :ocieties appointed or dee%ed to ha!e $een appointed under the 4ct+ and includes a person upon who% all the powers o" a ;egistrar ha!e $een con"erred under the 4ct( Re(a#ment o% loans: Sec *: Notwithstanding anything contained in any other law "or the ti%e $eing in "orce or in any agree%ent or other instru%ent+ award or decree o" any Court+ e!ery loan outstanding+ whether $arred $y li%itation or not+ in whole or in part and e!ery loan+ any install%ent whereo" is outstanding shall+ unless repaid earlier+ $e repaid and secured in the %anner pro!ided in section 6U( Su((l# o% in%ormation to t)e Registrar: Sec 1 )!ery co-operati!e society and co-operati!e $ank+ through its -anager or :ecretary+ shallNwhen a loan o$tained "ro% it is not repaid $y the date on which it is due "or repay%ent+ $ring such "act+ together with "ull details o" the case and the particulars o" the $orrower ;including in the case o" a benami loan+ the real $ene"iciary or recipient o" the loan8and surety to the notice o" 4ssistant ;egistrar+ when the a%ount o" the loan does not e9ceed "i!e hundred thousandU rupeesJ and to the notice o" the registrar+ when the a%ount o" the loan e9ceeds "i!e hundred thousands rupeesJ and when so directed $y the ;egistrar or the 4ssistant ;egistrar+ as the case %ay $e+ within thirty days o" receipt o" such direction+ "urnish to the ;egistrar+ or the 4ssistant ;egistrar+ as the case %ay $e+ "urnish "ull in"or%ation in respect o" all cases o" loans "alling under section ? re*uired to $e repaid or secured under section 6( Service o% notice to t)e borro'ers: Sec 0 =n receipt o" in"or%ation under section 7 Tor on his own in"or%ationU in respect o" any loan+ the ;egistrar or the 4ssistant ;egistrar+ as the case %ay $e+ shall issue or cause to $e issued a notice to the $orrower and his surety re*uiring the% to repay and secure the loan in accordance with the pro!isions o" section 6( 4 notice under su$-section 318 %ay $e ser!ed ;a<C By gi!ing or tendering it to the person na%ed in the noticeJ or ;b<C By enclosing it in a co!er and sending such co!er $y registered post+ acknowledg%ent due+ to the last known address o" the person na%ed in the noticeJ or ;c<C By a""i9ing such notice on a conspicuous part o" the last known residence o" the person na%ed in the noticeJ or ;d<C By pu$lication o" the notice in a newspaper( 7etermination o% liabilit# ')en loan is not admitted: Sec .: 104 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU <here any $orrower or his surety+ to who% notice under section B is issued+ does not ad%it the loan or any lia$ility arising there "ro%+ such $orrower or surety+ as the case %ay $e+ shall+ within thirty days o" the receipt o" the notice+ su$%it+ either personally or $y registered post 3acknowledg%ent due8+ a written state%ent to that e""ect to the ;egistrar or the 4ssistant ;egistrar+ $y who% such notice was issued or caused to $e issued+ and such ;egistrar or 4ssistant ;egistrar+ as the case %ay $e+ thereupon shall cause notice to $e issued to the co-operati!e society+ or the co-operati!e $ank+ as the case %ay $e+ and in the case o" a benami loan+ to the alleged $ene"iciary+ and shall+ a"ter %aking such in*uiry as he %ay consider necessary and gi!ing the parties a reasona$le opportunity o" $eing heard+ decide the %atter( Securing and re(a#ment o% loans: Sec 5 <ithin thirty days o" the ser!ice o" the notice under section B+ in a case where the $orrower does not deny the loan or the lia$ility arising there "ro%+ and in other cases+ within thirty days o" the decision o" the ;egistrar or the 4ssistant ;egistrar+ as the case %ay $e+ under section 6+ the $orrower and his surety shallN secure the loan or the lia$ility arising there "ro% $y %ortgage+ pledge+ hypothecation or assign%ent o" such property o" the $orrower or his surety or o" $oth as in the case o" a loan not e9ceeding "i!e hundred thousand rupees+ the 4ssistant ;egistrar+ and in the case o" a loan e9ceeding "i!e hundred thousand rupees+ the ;egistrar+ %ay think ade*uateJ and re(a# t)e loan a"ter thirty days o" the ser!ice o" notice under section B when he does not deny the loan or the lia$ility arising there "ro%+ and in any other case+ a"ter thirty days o" the decision o" the ;egistrar or the 4ssistant ;egistrar+ as the case %ay $e+ in eight %onths in "our e*ual install%ents+ the "irst install%ent $eing due on the day i%%ediately succeeding the one %onth period o" notice or+ as the case %ay $e+ the decision o" the ;egistrar or the 4ssistant ;egistrar speci"ied a$o!e( Recover# o% loans: Sec 6: ," the a%ount o" any loan or any part thereo" to $e repaid in accordance with the pro!isions o" section 6 is not paid within the period or the periods speci"ied in the said section+ the sa%e %ay+ without preDudice to the pro!isions o" section 10+ $e reco!ered according to the law and under the rules "or the ti%e $eing in "orce "or the reco!ery o" arrears o" land re!enue(U <here the $orrower is a "ir%+ partnership+ co%pany or other association o" persons 3not $eing a co%pany registered under the Co%panies 4ct+ 151?+ the lia$ility o" the %e%$ers whereo" is li%ited8+ the loan or any part thereo" due "ro% such $orrower %ay $e reco!ered "ro% the assets o" such "ir%+ partnership+ co%pany or other association o" persons+ as the case %ay $e+ or "ro% the %e%$ers or partners thereo"( Restrictions on registration o% documents: Sec 6+A Notwithstanding anything contained in any other law "or the ti%e $eing in "orce no registering o""icer shall register any docu%ent relating to property+ which is re*uired to $e registered under the pro!isions o" clause 3a8+ 3b8+ 3c8 or 3e8 o" section 16 o" the ;egistration 4ct+ 150C +or which is produced $e"ore hi% "or !oluntary registration+ nor shall any ;e!enue =""icer on the $asis o" any such docu%ent e""ect any %utation in the record o" rights under the pro!isions o" any law "or the ti%e $eing in "orce+ unlessN ; < 3a8 the person whose right+ title or interest in the property is or will $e trans"erred+ assigned+ li%ited or e9tinguished under the ter%s o" the docu%ent or on the $asis o" the %utation in the record o" rights+ as the case %ay $e+ "urnishes an a""ida!it to the registering o""icer or the re!enue o""icer+ as the case %ay $e+ to the e""ect that he does not owe any loan+ whether due i%%ediately or on a "uture date+ to a co-operati!e society or a cooperati!e $ankJ or 3b8 where such person owes a loan to a co-operati!e society or a co-operati!e $ank+ whether due i%%ediately or on a "uture date+ it is certi"ied $y the ;egistrar where the loan owed $y such person e9ceeds rupees "i!e hundred thousand+ and $y the 4ssistant ;egistrar where the loan owed $y such person does not e9ceed rupees "i!e hundred thousand+ that either satis"actory arrange%ents ha!e $een %ade "or the repay%ent o" the loan or that the loan has $een secured in accordance with the pro!isions o" section 6( <here an application is %ade to the ;egistrar or an 4ssistant ;egistrar+ as the case %ay $e+ "or issuing a certi"icate under the pro!isions o" su$-section 318+ he shall not re"use to issue the certi"icate unless he Copyright Virtual ni!ersity o" Pakistan 105
Banking Laws and Practices-BNK 601 VU has "irst gi!en the applicant an opportunity o" $eing heard and adducing e!idence to show that either satis"actory arrange%ents ha!e $een %ade "or the repay%ent o" the loan owed $y the applicant or that the loan has $een secured in accordance with the pro!isions o" section 6( 4n order %ade $y the ;egistrar or an 4ssistant ;egistrar under su$-section 3@8 re"using to issue a certi"icate+ shall $e "inal and not open to *uestion in any %anner(
Restrictions on alienations: Sec 6+& <here any person owing a loan+ whether due i%%ediately or on a "uture date+ to a co-operati!e society or a co-operati!e $ank has+ on or a"ter the twenty-se!enth day o" 4pril+ 1566+ alienated any i%%o!a$le property+ $y sale+ e9change+ gi"t+ %ortgage or will+ otherwise than $y or under an order or decree o" a Ci!il+ ;e!enue or Cri%inal Court+ which alienation is "raudulent with intent to de"eat the clai% o" a cooperati!e society or a co-operati!e $ank+ such alienation shall not operate to trans"er any right+ title or interest in the property o" the de$tor+ unlessN aC #he loan due "ro% the de$tor has $een repaidJ or bC ,t is certi"ied $y the ;egistrar+ where the loan e9ceeds rupees T"i!e hundred thousandU+ and $y the 4ssistant ;egistrar+ where the loan does not e9ceed rupees T"i!e hundred thousandU+ that either satis"actory arrange%ents ha!e $een %ade "or the repay%ent o" the loan or that the loan has $een secured in accordance with the pro!isions o" section 6( 4n alienation o" i%%o!a$le property shall $e dee%ed to $e "raudulent with intent to de"eat the clai% o" a co-operati!e society or a co-operati!e $ank "or the purposes o" su$-section 318+ i" the ;egistrar+ a"ter gi!ing the person $y who% the alienation has $een %ade+ and the person or persons in whose "a!or the alienation has $een %ade an opportunity o" $eing heard+ issues a declaration to the e""ect that the alienation is "raudulent with intent to de"eat the clai% o" a co-operati!e society or a co-operati!e $ank( 4ny party aggrie!ed $y a decision %ade $y the ;egistrar under su$-section 3@8 %ay pre"er an appeal to >o!ern%ent against such decision+ and the order %ade $y >o!ern%ent+ on such appeal passed a"ter gi!ing an opportunity o" $eing heard to the appellant shall $e "inal and shall not $e open to *uestion in any %anner( /o'er o% Registrar ')en ma$ing in:uir#: Sec #he ;egistrar or the 4ssistant ;egistrar+ as the case %ay $e+ shall+ "or the purpose o" %aking any in*uiry under this =rdinance+ ha!e the sa%e powers as are !ested in a Ci!il Court under the Code o" Ci!il Procedure+ 150C 34ct V o" 150C8+ when trying a suit+ in respect o" the "ollowing %atters+ na%ely&3a8:u%%oning and en"orcing the attendance o" any person and e9a%ining hi% on oathJ 3$8 ;e*uiring the disco!ery or production o" any docu%entJ 3c8 ;e*uisitioning any pu$lic record "ro% any Court or o""iceJ 3d8 ,ssuing co%%issions "or the e9a%ination o" witnessesJ 3e84ppointing guardians or ne9t "riends o" persons who are %inors or o" unsound %indJ 3g8 4dding legal representati!es o" deceased $orrowers or suretiesJ 3h8 :u$stituting the na%es o" right"ul parties+ including the $ene"iciaries o" benami loansJ Consolidation o" casesJ 3i8 4ny other %atter which %ay $e prescri$ed $y rules %ade under section 1@J and 3j8)n"orcing any order %ade $y hi% under the pro!isions o" this =rdinance or the rules "ra%ed there under( /enalt#: Sec 8 <hoe!er contra!enes any o" the pro!isions o" this =rdinance or the rules %ade there under shall $e punisha$le with i%prison%ent "or a ter% which %ay e9tend to se!en years+ or with "ine+ which+ in the case o" de"ault in the repay%ent o" a loan+ shall not $e less than one-"ourth o" the a%ount o" the loan outstanding against hi%+ or with $oth( /rocedure: Sec 106 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU 318 No Court shall take cogni2ance o" any o""ence under this =rdinance e9cept on a co%plaint in writing %ade $y the ;egistrar or an 4ssistant ;egistrar+ or $y a person duly authori2ed $y the ;egistrar or 4ssistant ;egistrar( 3@8Notwithstanding anything to the contrary contained in the Code o" Cri%inal Procedure+ 1C5C+ the pro!isions o" Chapter SS o" the said Code shall apply to the trial o" cases under this =rdinance(U /o'er to ma$e rules: Sec ! >o!ern%ent %ay+ $y noti"ication in the o""icial >a2ette+ %ake rules+ to carry out the purposes o" this =rdinance( &ar o% @urisdiction: Sec * No Court or other authority shall ha!e DurisdictionN ;a<C #o entertain or adDudicate upon any %atter which T>o!ern%ent+ the ;egistrarU or the 4ssistant ;egistrar is e%powered $y or under this =rdinance or the rules "ra%ed there under to dispose o" or deter%ineJ or ;b<C #o *uestion the legality or !alidity o" anything done under this =rdinance or the rules "ra%ed there under $y T>o!ern%ent+ the ;egistrarU or 4ssistant ;egistrar( No Court or other authority shall $e co%petent to grant an inDunction or other order in relation to any proceedings $e"ore the ;egistrar or the 4ssistant ;egistrar+ or anything done or to $e done $y or at the instance o" the ;egistrar or the 4ssistant ;egistrar under this =rdinance or the rules "ra%ed there under( "rom t)e above, 'e understand t)at (rovision o% la' is a ver# im(ortant as(ect o% t)e coo(erative ban$ing but at t)e same time recover# o% t)e loan disbursed is e:uall# im(ortantC T)e above statutor# (rovisions (rovide a legal %rame'or$ %or recover# granted b# coo(erative ban$sC Establis)ment o% "ederal &an$ %or Co+O(erative and regulation o% Co+O(erative &an$ing Act, -55 #his 4ct %ay $e called the esta$lish%ent o" the /ederal Bank "or Co-=perati!e and regulation o" Cooperati!e Banking 4ct+ 1566( ,t e9tends to the whole o" Pakistan and also applies to the $usiness o" the Bank transacted outside Pakistan and to persons conducting such $usiness( ,t shall co%e into "orce at once and shall $e dee%ed to ha!e taken e""ect on the 5 th day o" =cto$er+ 1566( ?n t)is Act 'e s)all cover t)e %ollo'ing as(ects9 statutor# (rovisions: 7e%inition: L A((roved securitiesP %eans securities in which a trustee %ay in!est %oney under clause 3a8+ clause 3$8+ clause 3$$8+ clause 3c8 or clause 3d8 o" section @0 o" the #rusts 4ct+ 1CC@+ and such other securities as the /ederal >o!ern%ent %ay+ $y noti"ication in the o""icial >a2ette+ declare to $e appro!ed securities "or purposes o" this 4ctJ L&an$P %eans the "ederal &an$ %or Co+o(eratives esta$lished under section BJ F&oardP %eans the &oard o% 7irectors constituted under section 5J FChair%anG %eans the Chair%an o" the BoardJ FCo+o(erative ban$P %eans a $anking society as de"ined in the )9planation to the su$-section 3@8 o" section 6 o" the Co-operati!e :ocieties 4ct+ 15@B+ other than a pro!incial Co-operati!e BankJ LCo+o(erative societ#P %eans a society registered in Pakistan under any law "or the ti%e $eing in "orce relating to registration o" co-operati!e societies and a Fpri%ary co-operati!e societyG %eans such a society o" which no other society is a %e%$erJ L&orro'erP %eans a person who has o$tained a loan "ro% the Bank o" a Pro!incial Co-operati!e Bank and includes a surety or an inde%ni"ier+ $ut does not include the /ederal >o!ern%ent or a Pro!incial >o!ern%ent( L7emand 4iabilitiesP %eans lia$ilities which are to $e %et on de%and and Fti%e lia$ilitiesG %eans lia$ilities which are not de%and lia$ilitiesJ L7irectorP %eans a 'irector "or the ti%e $eing o" the BoardJ J7istrict @udgeP in respect o" areas where a 'istrict Audge does not ha!e unli%ited pecuniary Durisdiction in original ci!il suits+ a high Court e9ercising original ci!il DurisdictionJ Copyright Virtual ni!ersity o" Pakistan 107
Banking Laws and Practices-BNK 601 VU L"amil# membersP in relation to a person %eans his spouse+ dependent lineal ascendants and descendants and dependent $rothers and sistersJ FLoans, advances and creditP includes "inance as de"ined in the Banking #ri$unals =rdinance+ 15C7+ and all cognate e9pressions shall $e construed accordingly& LManaging 7irectorP %eans -anaging 'irector o" the Bank and includes any person "or the ti%e $eing discharging the "unctions o" the -anaging 'irectorG LMulti+unit co+o(erative societ#P %eans a co-operati!e society to which the %ulti- nit Co-operati!e :ocieties 4ct+ 157@ applies L/rescribedP %eans prescri$ed $y rulesJ L/rovincial Co+o(erative &an$G %eans a co-operati!e society the pri%ary o$Dect o" which is to %ake loans to the co-operati!e societies which are its %e%$ers and which is noti"ied+ "or the purposes o" this 4ct+ to the Bank $y the Pro!incial >o!ern%ent o" the Pro!ince within which the co-operati!e society is registered or+ until a co-operati!e society is so noti"ied+ any one o" the "ollowing na%ely& #he Baluchistan Pro!incial Co-operati!e Bank Ltd #he /rontier Pro!incial Co-operati!e Bank Ltd #he PunDa$ Pro!incial Co-operati!e Bank Ltd #he :indh Pro!incial Co-operati!e Bank Ltd LRegulationP %eans a regulation %ade under this 4ctJ LSc)eduled &an$P has the sa%e %eaning as in :tate Bank o" Pakistan 4ct+ 15B6 LState &an$P %eans the :tate Bank o" the Pakistan esta$lished under the :tate Bank o" Pakistan 4ct+ 15B6 Establis)ment o% t)e &an$: Sec 0 4s soon as %ay $e a"ter the co%ing into "orce o" this 4ct+ the /ederal >o!ern%ent shall take steps to esta$lish+ in accordance with the pro!isions o" this 4ct+ a Bank to $e called F #he /ederal Bank "or cooperati!esG to carry out the purposes o" this 4ct+ #he Bank shall $e a $ody corporate ha!ing perpetual succession and a co%%on seal+ with powers to ac*uire+ own+ hold and dispose o" any property+ and shall $y the na%e assigned to it $y su$-section 318 sue and $e sued( #he Bank shall $e dee%ed to $e a $anking co%pany "or the purposes o" the :tate Bank o" Pakistan 4ct+ 15B6+ the $anking Co%panies =rdinance+ 156@ and any other law "or the ti%e $eing in "orce relating to $anking co%panies+ e9cepting the Banks 3Nationali2ation8 4ct+ 1567 S)are Ca(ital: Sec . #he initial share capital o" the Bank shall $e twenty crors o" rupees di!ided into tow thousand "ully paid up shares o" the no%inal !alue o" one hundred thousand rupees each shall $e "ully su$scri$ed $y the /ederal >o!ern%ent+ the pro!incial >o!ern%ents and the :tate Bank o" Pakistan in the "ollowing %anner&--;a< "ederal Government Rs !C88 crores 3$8 :tate Bank ;s 1B(00 crores 3c8 >o!ern%ent o" the PunDa$ ;s 1(00 crores 3d8 >o!ern%ent o" :indh ;s 1(00 crores( 3e8 >o!ern%ent o" N(<(/(P ;s 0(B0 crores 3"8 >o!ern%ent o" Baluchistan ;s 0(B0 crores #he share capital %ay $e increased "ro% ti%e to ti%e $y a resolution o" the Board with the appro!al o" the /ederal >o!ern%ent and the capital so increased shall $e "ully su$scri$ed $y the /ederal >o!ern%ent+ the pro!incial >o!ern%ents and the :tate Bank o" Pakistan( 7irection and su(erintendence: Sec 6 #he general direction and superintendence o" the a""airs and $usiness o" the $ank shall !est in a &oard o% 7irectors constituted in accordance with section 5+ which %ay e9ercise all such powers and do all such acts and things as %ay $e e9ercised or done $y the Bank+ su$Dect to the pro!isions o" this 4ct( &oard: Sec 108 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU #he Board shall consist o"& #he Chair%anJ 4ll the directors "or the ti%e $eing o" the Central $oard o" 'irectors o" the :tate BankJ #he -anaging 'irectorJ #wo directors to $e no%inated $y the /ederal >o!ern%ent+ o" who% one shall $e o""icer o" %inistry o" >=P and other a non-o""icialJ and #he Board shall consist o"& e( #wo directors "ro% each Pro!ince to $e no%inated $y the /ederal >o!ern%ent on the reco%%endation o" each Pro!incial >o!ern%ent+ o" who% on shall $e a non-o""icial( #he >o!ernor "or the ti%e $eing o" the :tate Bank shall $e the Chair%an o" the Board( nless the /ederal >o!ern%ent otherwise directs in any case+ a non-o""icial 'irector re"erred to in clause 3d8 or clause 3e8 o" su$-section 1 shall hold o""ice "or a period o" three #ears and shall+ su$Dect toe the pro!ision o" this 4ct $e eligi$le "or re-appoint%ent( Managing 7irector ;Sec 8< M s)all be a((ointed b# t)e %ederal governmentC S)all be ')ole time c)ie% eBecutiveC 7is:uali%ications o% Managing 7irector and 7irectors ;Sec <M legislators, insolvent, minor, o% unsound mind, govtC servant, not citiHenC ?ndemnit# o% 7irectors ;Sec 1<M i% acted in good %ait)C &usiness and "unctions: Sec 5 #he Bank shall $e the principal "inancing institution "or %eeting the credit needs o" pro!incial Cooperati!e Banks and %ulti-unit co-operati!e societies( #he $ank %ay carry on+ transact or do the se!eral kinds o" $usiness and acts hereina"ter speci"ied na%ely&-Acce(t mone# on de(ositN &orro' %unds %rom t)e "ederal Government, %inancial institutions Raise %unds %or t)e (ur(ose o% t)e &an$3s o(eration t)roug) issue and sale o% bonds ++ ++ debenturesN Obtain or raise %unds on the basis o% participation in pro"it and loss+ mar$+u( and %ark---down in price+ )ire+(urc)ase, rent s)aring+ licensing etc Ma$e secured loans and advances to (rovincial Co+o(erative &an$+ %ulti-unit co-operati!e societies and+ su$Dect to the regulations "ra%ed "or the purpose+ to the o""icers and sta"" o" the BankJ 'raw+ acce(t, discount+ $uy or sell or rediscount $ills o" e9change or pro%issory notes $earing two or %ore good signatures+ one o" which shall $e that o" scheduled $ank o" a pro!incial Co-operati!e BankJ ,ssue guarantees and gi!e inde%nities in relation to its $usinessJ Subscribe to t)e debentures 3Participation ter% certi"icates+ ter% "inance certi"icates etc8 repaya$le within a period not e9ceeding 10 years 7eliver+ recei!e+ collect and re%it an# securities /urc)ase or otherwise ac*uire in t)e normal course o" its $anking $usiness any Moveable or immovable (ro(ert#+ residential or co%%ercial etc O(en accounts or enter into any agenc# arrangement with any $ank or "inancial institution in or outside Pakistan( ?nvest its "unds in >o!ern%ent :ecurities and other appro!ed securities and i" so directed $y the Board and with the appro!al o" the /ederal >o!ern%ent+ in the share capital o"& 4 Pro!incial Co-operati!e Bank 3so that the a%ount so in!ested is not less than8 twenty-"i!e percent o" the "resh capital contri$uted $y the Pro!incial >o!ern%ent 4 %ulti-unit co-operati!e society up to an a%ount not e9ceeding @BY o" its paid-up capital Sell and realiHe (ro(ert#, %o!a$le or i%%o!a$le+ patents+ designs+ trade %arks+ which %ay in any way co%e into the ownership+ possession or control o" the Bank in the satis"action or part satis"action o" any o" its clai%s( Copyright Virtual ni!ersity o" Pakistan 109
Banking Laws and Practices-BNK 601 VU Assist Pro!incial Co-operati!e Banks in preparing their seasonal and de!elop%ental loaning progra%s and conduct appraisal and undertake "easi$ility study o" proDects co!ered $y such loaning progra%s )ncourage the de!elop%ent o" special co-operati!e proDects( )sta$lish independent su$sidiaries( OrganiHe training in co-operati!e $anking "or the e%ployees o" the Pro!incial Co-operati!e $anks and other co-operati!e societies )nsure proper utili2ation o" loans o$tained "ro% the $ank Carr# out researc) on pro$le%s o" rural credit 4end mone# in the inter-$ank call %oney %arket ?ssue letters o% credit A((oint attorne# and agentsJ Maintain and o(erate t)e (rovident %und and other "unds created "or the $ene"it i" its em(lo#ees Per"or% such "unctions and e9ercise such powers as %ay $e entrusted to or con"erred upon it $y or under any lawJ and >enerally do all such %atters and things as %ay $e necessary+ incidental to or conse*uential upon e9ercise o" its powers or the discharge o" its duties or "unctions under this 4ct or any other law( /o'er to borro' or obtain %inance ;Sec -<Dthe $ank %ade "or the purpose o" its $usiness $orrow or o$tain "unds( /o'er to call %or (a#ment be%ore agreed (eriod ;Sec ! <D the $ank %ay $y notice %ay re*uire any $orrower to which it has granted any loan to repay the sa%e in "ull "orth with( /o'er to ins(ect ;Sec !0<Dthe $ank %ay at any ti%e under directions o" the :tate Bank o" Pakistan shall inspect any pro!incial cooperati!e $ank or %ulti-unit cooperati!e society including its $ranches and o""ices and its $ooks+ accounts and docu%ents( /o'er to (ro)ibit acce(tance o% de(osits ;Sec !.<D the :tate Bank on reco%%endations o" the $ank %ay prohi$it or restrict the acceptance o" deposits $y pro!incial cooperati!e $ank or %ulti-unit cooperati!e society( 1owe!er no such order shall $e passed without prior appro!al in writing on the "ederal go!ern%ent( Maintenance o% li:uid assets ;Sec !-<De!ery pro!incial cooperati!e $ank shall $e re*uired to %aintain the prescri$ed li*uid assets /o'er to remove 7irectors, ot)er managerial (ersons %rom o%%ice and to su(ersede &oard o% 7irectors, o% /rovincial Co+o(erative &an$ ;Sc*8<D the $ank shall ha!e sa%e powers as are con"erred on the :tate Bank+ in this regard( /o'er o% t)e &an$ to call %or statements and return, etcC, and to (ublis) in%ormation ;Sec * < 7ut# o% t)e o%%icers and servants to maintain secrec# ;Sec *!< 4i:uidation o% t)e &an$ ; Sec 1 <DNo pro!isions o" law relating to the winding up o" the co%panies or $anks shall apply to the $ank and the $ank shall not $e wound up $ut $y the order o" "ederal go!ern%ent on the reco%%endation o" :tate Bank( "ederal &an$ %or Co+O(erative and Regulation o% Co+O(erative &an$ing ;Account< Rules T)ese rules ma# be called t)e "ederal &an$ %or Co+O(eratives and Regulation o% Co+o(erative &an$ing ;Account< Rules, -55 /re(aration o% statements o% accounts: ,%%ediately a"ter the close o" each "inancial year+ the $ank shall prepare a $alance sheet and the state%ent o" pro"it and loss+ as nearly as %ay $e+ in the "or% set out in the :econd :chedule to the Banking Co%panies =rdinance+ 156@+ "or e9a%ination o" the auditors and pro!ided under section ?6 o" the )sta$lish%ent o" the /ederal Bank "or Co-operati!e and ;egulation o" Co-operati!e Banking 4ct+ 1566 #he audited $alance sheet and the state%ent o" pro"it and loss shall $e su$%itted to the Board "or appro!al not later than the "i"teenth o" :epte%$er each year( #he $alance sheet and the state%ent o" pro"it and loss as appro!ed $y the Board+ shall $e signed $y the at least two 'irectors no%inated $y the Board "or this purpose and the -anaging 'irectors( <ithin three %onths o" the close o" each "inancial year+ the Board shall su$%it a copy o" each o" the appro!ed $alance sheet+ the state%ent o" pro"it and loss account and the report o" the auditors to the -inistry o" /inance+ >o!ern%ent o" Pakistan+ "or pu$lication in the o""icial >a2ette( 110 Copyright Virtual ni!ersity o" Pakistan
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Banking Laws and Practices-BNK 601 M?CRO"?NANCE ?NST?TUT?ONS OR7?NANCE, !88 T)e Cor(orate and ?ndustrial Restructuring Cor(oration Ordinance, !888 Micro%inance ?nstitutions Ordinance, !88
VU LESSON 19
,t e9tends to the whole o" Pakistan( #his =rdinance contains pro!isions with regard to %icro"inance institution( :o%e o" the i%portant aspects are discussed hereunder( 7e%initions: the de"initions as contained in the =rdinance are gi!en hereunder& LAuditorP %eans any person who is appointed in accordance with the pro!isions o" this =rdinance "or the audit o" the accounts o" a %icro"inance institutionJ L&an$ing Com(an#Fs ordinanceP %eans the Banking Co%panies =rdinance+ 156@( LCom(an#G %eans a co%pany incorporated under the Co%panies =rdinance+ 15C7( =r any other law "or the ti%e $eing in "orceJ LCustomerP %eans any person or group o" persons a!ailing the ser!ices o" a %icro"inance institutionJ L7e(ositP %eans the deposit o" %oney+ repaya$le on de%and or otherwise+ accepted $y a %icro"inance institution "ro% the pu$lic "or the purpose o" pro!iding %icro"inance ser!icesJ L7e(ositorP %eans a person in whose na%e a deposit is held $y a %icro"inance institutionJ L4icenseP %eans the license issued $y the :tate Bank and the e9pression FlicensedG should $e construed accordinglyJ LMemberP %eans the %e%$er or shareholder who has contri$uted or su$scri$ed to the capital o" a %icro"inance institutionJ LMicro%inance institutionP %eans a co%pany that accepts deposits "ro% the pu$lic "or the purpose o" pro!iding %icro"inance ser!icesJ LMicro%inance servicesP %eans the "inancial and other related ser!ices speci"ied in section 6+ the !alue o" which does not e9ceed such a%ount as the :tate Bank %ay+ "ro% ti%e to ti%e+ deter%ineJ L/oor (ersonsG %eans persons who ha!e %eager %eans o" su$sistence and whose total inco%e or receipt during a year is less than the %ini%u% ta9a$le li%it set out in the law relating to inco%e-ta9J L/rescribedG %eans prescri$ed $y rules %ade under this =rdinanceJ LS(eci%ied areaG %eans the district+ pro!ince or other speci"ied area within which a %icro"inance institution is licensed to operateJ and LState ban$P %eans the :tate Bank o" Pakistan esta$lished under the :tate Bank 4ct+ #he pro!isions o" this =rdinance shall $e in addition to+ and+ sa!e as hereina"ter pro!ided+ not in derogation o"+ any other law "or the ti%e $eing in "orce( Restrictions on establis)ment and o(erations: Sec 1 No person+ other than a co%pany+ shall $e esta$lished as a %icro"inance institution( No %icro"inance institution shall co%%ence+ or carry on+ the $usiness o" taking deposits unless and until such institution has $een licensed in accordance with the pro!isions o" this =rdinance( Name: Sec 0 No person other than a licensed %icro"inance institution shall use with its na%e the words F-icro"inance BankG+ F-/BE+ F-icro"inance ,nstitutionG or F-/,G or deri!ati!es or any words or letters which suggest that it is a %icro"inance institution( <hoe!er+ without $eing licensed+ uses the na%e F-icro"inance BankG + F-/BG+ F-icro"inance ,nstitutionG or F-/, F or deri!ati!es or any word or letters which suggest that it is a %icro"inance institution shall $e punisha$le with i%prison%ent "or a ter% which %ay e9tend to si9 %onths and with "ine which %ay e9tend to one hundred thousand rupees( "unctions and (o'ers: Sec . 4 %icro"inance institution shall+ in accordance with prudential regulations and su$Dect to the ter%s and conditions o" the license issued $y the :tate $ank+ render assistance to %icro-enterprises and pro!ide 112 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU %icro"inance ser!ices in a sustaina$le %anner to poor persons+ pre"era$ly poor wo%en+ with a !iew to alle!iating po!erty <ithout preDudice to the generality o" the "oregoing pro!isions+ the powers and "unctions o" %icro"inance institutions shall $e&a( #o pro!ide "inancing "acilities+ with or without collateral security+ in cash or in kind+ "or such ter%s and su$Dect to such conditions as %ay $e prescri$ed+ to poor persons "or all types o" econo%ic acti!ities including housing+ $ut e9cluding $usiness in "oreign e9change transactionsJ $( #o accept depositsJ c( #o accept pledges+ %ortgages+ hypothecations or assign%ents to it o" any kind o" %o!a$le or i%%o!a$le property "or the purpose o" securing loans and ad!ances %ade $y itJ d( #o undertake the %anage%ent+ control and super!ision o" any organi2ation+ enterprise+ sche%e+ trust "und or endow%ent "und "or the $ene"it and ad!ance%ent o" poor personsJ e( #o $uy+ sell and supply on credit to poor persons industrial and agricultural inputs+ li!estock+ %achinery and industrial raw %aterials+ and to act as agent "or any =rgani2ation "or the sale o" such goods or li!estockJ "( #o in!est in shares o" any $ody corporate+ the o$Decti!e o" which is to pro!ide %icro"inance ser!ices to poor personsJ g( #o pro!ide storage and sa"e custody "acilitiesJ h( #o carry out sur!ey and research+ and to issue pu$lication and %aintain statistics relating to the i%pro!e%ent o" econo%ic condition o" poor personsJ i( #o pro!ide pro"essional ad!ice to poor persons regarding in!est%ents in s%all $usiness and such cottage industries as %ay $e prescri$edJ D( #o encourage in!est%ents in such cottage industries and inco%e generating proDects "or poor persons as %ay $e prescri$ed k( #o pro!ide ser!ices and "acilities to custo%ers to hedge !arious risks relating to %icro"inance acti!itiesJ l( #o render %anagerial+ %arketing+ technical and ad%inistrati!e ad!ice to custo%ers and assisting the% in o$taining ser!ices in such "ieldsJ %( #o $orrow and raise %oney and open $ank accountsJ n( #o purchase+ take on lease+ or otherwise ac*uire+ sell+ e9change+ surrender+ lease+ %ortgage+ dispose o" and deal in any %o!a$le and i%%o!a$le property and rights o" all kinds "or and on $ehal" o" its custo%ers "or the purpose o" pro%oting de!elop%ent opportunities+ $uilding o" assets+ resource allocation+ pro%otion o" %arkets+ and adoption o" $etter technology "or econo%ic growth and de!elop%entJ o( #o esta$lish su$sidiaries+ whether wholly or partly owned+ and to appoint agents in !arious locations "or !arious acti!ities which it %ay consider necessary "or the proper discharge o" its "unctionsJ p( #o pay+ recei!e+ collect and re%it %oney and securities within the countryJ *( #o ac*uire+ %aintain and trans"er all %o!a$le and i%%o!a$le property including residential pre%ises+ "or carrying on its $usinessJ r( #o open account or %ake any agency arrange%ent 'it), and to act as agent or corres(ondent o%, an# ban$ or %inancial institutionN s( #o in!est its surplus "unds in >o!ern%ent securitiesJ t( #o i%pose and recei!e "ees+ charges+ pro"its or return "or its ser!icesJ u( #o %o$ili2e and pro!ide "inancial and technical assistance and training to %icro enterprisesJ !( #o undertake %o$ile $anking to e9pedite transactions and reduce costsJ w( #o esta$lish trust and endow%ent "undsJ 9( #o recei!e grants "ro% the go!ern%ent and any other sources per%itted $y the :tate BankJ and y( #o generally do and per"or% all such acts+ deeds and things as %ay $e necessary+ incidental or conduci!e to the "ul"ill%ent o" their "unctions and the attain%ent o" their o$Decti!esJ /ro)ibition and restrictions: Sec 5 4 %icro"inance institution shall not undertake or transact any kind o" $usiness other than that authori2ed $y+ or under+ this =rdinance( Copyright Virtual ni!ersity o" Pakistan 113
Banking Laws and Practices-BNK 601 VU ,n per"or%ance o" its "unctions under this =rdinance+ a %icro"inance institution shall ha!e proper regard to the econo%ic and co%%ercial %erits o" any or the transactions or acti!ities it plans to undertake or assist <here a %icro"inance institution is re*uired $y any authority to undertake or assist a %icro enterprise or other such acti!ities which it considers econo%ically or otherwise unsound+ the %icro"inance institution shall not undertake or assist such acti!ity until and unless the said authority has pro!ided ade*uate guarantee to the %icro"inance institution or inde%ni"y any losses that it %ay incur in the undertaking o" such acti!ity( No %icro"inance institution shall create a "loating charge on the undertaking or any o" its assets or part thereo"+ unless the creation o" such "loating charge is certi"ied in writing $y the :tate Bank as not $eing detri%ental to the interest o" the depositors o" such institution 4ny such charge created without o$taining the certi"icate o" the :tate Bank shall $e in!alid( 4ny %icro"inance institution aggrie!ed $y the re"usal o" a certi"icate under su$-section 378 %ay+ within thirty days "ro% the date on which such re"usal is co%%unicated to it+ pre"er an appeal to the Central Board o" the :tate Bank whose decision thereon shall $e "inal( Area o% o(eration: Sec 4 %icro"inance institution shall $e licensed to operate in an area which %ay consist o"+4 districtJ 4 pro!inceJ or #he whole o" Pakistan Ca(italiHation: Sec 8 No %icro"inance institution shall operate unless it has a paid up capital o" not less than+3a8 =ne hundred %illion rupees or such higher a%ounts+ as %ay $e prescri$ed "ro% ti%e to ti%e+ "or %icro"inance institutions to who% a license to operate in a speci"ied district is issued( 3$8 two hundred and "i"ty %illion rupees or such higher a%ount as %ay $e prescri$ed "ro% ti%e to ti%e+ "or %icro"inance institutions to who% a license to operate in a speci"ied pro!ince is issuedJ and 3c8 "i!e hundred %illion rupees or such higher a%ount as %ay $e prescri$ed "ro% ti%e to ti%e+ %icro"inance institutions to who% a license to operate nationally is issued( Not less than "i"ty-one per cent o" the paid up capital o" a %icro"inance institution shall $e su$scri$ed $y the pro%oters or sponsor %e%$ers and the shares su$scri$ed to $y the pro%oters or sponsor %e%$ers shall re%ain in the custody o" :tate Bank and shall neither $e trans"era$le nor encu%$rance o" any kind shall $e created thereon without prior per%ission+ in writing+ o" the :tate Bank( 2inding U(: Sec #he pro!isionsE o" Banking Co%panies =rdinance "or winding up o" $anking co%panies shall+ mutates mutandis+ apply to %icro"inance institutions "or the purpose o" their winding up( EBisting micro%inance institutions: Sec ! 4ny person per"or%ing the "unctions o" a %icro"inance institution on the co%%ence%ent o" this =rdinance shall on such "or% acco%panying such in"or%ation and "ee as %ay $e prescri$ed+ %ake an application to the :tate Bank "or issuance o" a license to take deposits( #he :tate Bank %ay+ on receipt o" the application+ %ake such en*uiries as it considers necessary and either grant a license as speci"ied in su$-sections 3@8 and 3?8 o" section 1? or+ "or reason to $e recorded in writing+ reDect the application "or the license( 4ny person per"or%ing the "unctions o" a %icro"inance institution on the co%%ence%ent o" this =rdinance shall on such "or% acco%panying such in"or%ation and "ee as %ay $e prescri$ed+ %ake an application to the :tate Bank "or issuance o" a license to take deposits( #he :tate Bank %ay+ on receipt o" the application+ %ake such en*uiries as it considers necessary and either grant a license as speci"ied in su$-sections 3@8 and 3?8 o" section 1? or+ "or reason to $e recorded in writing+ reDect the application "or the license 114 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU <here an application "or a license has $een %ade in respect o" a %icro"inance institution in e9istence on the co%%ence%ent o" this =rdinance+ and such application is reDected+ the operations o" the %icro"inance institution %ay $e continued "or a period o" thirty days "ro% the date on which its application is reDected+ or i" an appeal is re"erred under su$section 378+ until such appeal is disposed o"( ," the :tate Bank reDects an application "or a license in respect o" a %icro"inance in e9istence on the co%%ence%ent o" this =rdinance+ the applicant %ay+ within thirty days "ro% the date o" the order o" the :tate Bank+ pre"er an appeal to the Central Board o" the :tate Bank+ and the order passed $y the Central Board shall $e "inal( 4icensing: Sec * Be"ore taking deposits+ a %icro"inance institution shall apply to the :tate Bank+ on such "or% acco%panying such in"or%ation and "ee as %ay $e prescri$ed+ "or issuance o" a license to take deposits( #he :tate Bank %ay issue license to operate in a speci"ic district+ pro!ince or other area+ su$Dect to such conditions as the :tate Bank %ay think "it to i%pose( Be"ore granting any license under this section+ the :tate Bank shall satis"y itsel" $y an inspection o" the $ooks o" the %icro"inance institution or otherwise that all or any o" the "ollowing conditions are "ul"illed+ na%ely&3a8 #hat the %icro"inance institution is+ or will $e+ in a position to %eet its lia$ilities to the present or "uture custo%ers in "ull as and when such lia$ilities accrueJ and 3$8 that the a""airs o" the %icro"inance institution are not $eing+ or are not likely to $e+ conducted in a %anner detri%ental to the interests o" its %e%$ers and present or "uture custo%ers( #he :tate Bank %ay suspend or cancel a license granted to a %icro"inance institution i" such institution& 3a8 4t any ti%e "ails to co%ply with any o" the conditions i%posed upon it under su$-section 3@8J or 3$8 /ails to "ul"ill+ at any ti%e+ any o" the conditions re"erred to in su$-section 3?8J 3c8 1as "urnished "alse or %isleading in"or%ation in its application "or a licenseJ or No license shall $e suspended or cancelled under su$section 378 unless and until the %icro"inance institution is called upon $y a notice in writing $y the :tate Bank to show cause within "i"teen days as to why its license should not $e suspended or cancelled( ,n the e!ent o" suspension or cancellation o" a license the %icro"inance institution concerned shall $e noti"ied "orthwith and+ "ro% the date o" such noti"ication+ shall cease to transact any $usiness other than that re*uired to wind up its a""airs with the appro!al o" the :tate Bank( #he :tate Bank shall pu$lish notice o" such suspension or cancellation in one leading rdu language newspaper and one )nglish language newspaper in addition to its pu$lication in the o""icial >a2ette( #he pro!isions o" su$-section 378 shall not preDudice the rights or clai%s o" any person against the %icro"inance institution or o" the %icro"inance institution against any person( 4 %icro"inance institution aggrie!ed $y the decision o" the :tate Bank "or suspension or cancellation o" its license %ay+ within thirty days "ro% the date on which such decision is co%%unicated to it+ apply "or re!iew to the Central Board o" the :tate Bank( #he decision o" the :tate Bank+ su$Dect to the result o" re!iew $y the Central Board o" the :tate Bank under su$-section 3C8+ shall $e "inal( Management and administration: Sec 1 #he general superintendence and %anage%ent o" the a""airs o" a %icro"inance institution shall !est in its Board o" 'irectors which shall %anage its $usiness and a""airs in accordance with the principles o" good go!ernance( #here shall $e a chie" e9ecuti!e o""icer who shall work "ull ti%e and $e responsi$le "or the day-to-day ad%inistration o" %icro"inance institution( #he :tate Bank shall ensure that the persons ser!ing on the Board o" 'irectors and the chie" e9ecuti!e o""icer o" a %icro"inance institution are persons o" integrity and ha!e good "inancial reputation( Accounts: Sec 0
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Banking Laws and Practices-BNK 601 VU 4 %icro"inance institution shall %aintain proper $ooks o" accounts and+ at the e9piration o" each calendar year+ prepare annual state%ent o" accounts including the pro"it and loss account and $alance sheet as %ay $e prescri$ed( 4 %icro"inance institution shall+ in respect o" such accounts+ co%ply with such general directions as the :tate Bank %ay+ "ro% ti%e to ti%e+ issue( Audit: Sec . #he accounts o" a %icro"inance institution "or each accounting year ending ?1st 'ece%$er shall $e audited $y one or %ore auditors who are chartered accountants within the %eaning o" the Chartered 4ccountants =rdinance+ 1561 3 S o" 15618+ and whose na%es are included in the panel o" appro!ed auditors %aintained $y the :tate Bank( #he auditor or auditors shall $e appointed "or such ter%s and on such re%uneration+ to $e paid $y the %icro"inance institution+ as the Board o" 'irectors o" such institution %ay "i9& Pro!ided that the auditors once appointed shall not $e re%o!ed $e"ore three years without the prior appro!al o" the :tate Bank and no auditor shall ser!e as e9ternal auditor o" a %icro"inance institution consecuti!ely "or %ore than three years( )!ery auditor+ appointed under su$-section 3@8+ shall $e gi!en a copy o" the annual $alance sheet and other accounts o" the %icro"inance institution who shall e9a%ine it+ together with the accounts and !ouchers relating thereto+ and shall ha!e a list deli!ered to hi% o" all $ooks kept $y the %icro"inance institution #he auditors shall report to the Board o" 'irectors o" the %icro"inance institution upon the annual accounts and $alance sheet and in their report they shall state whether+ in their opinion+ the $alance sheet contains all necessary particulars and is properly drawn up so as to e9hi$it a true and correct !iew o" the state o" a""airs o" the %icro"inance institution and+ in case they ha!e called "or any e9planation or in"or%ation "ro% the %icro"inance institution+ whether it has $een gi!en and whether it is satis"actory( #he audited "inancial state%ents shall $e pu$lished within three %onths o" close o" its "inancial year and %icro"inance institution shall cause its accounts to $e pu$lished in a daily newspaper ha!ing wide circulation in the speci"ied area( 4 %icro"inance institution shall su$%it audited "inancial state%ents along with auditorsE report to the :tate Bank within three %onths o" the close o" its "inancial year Nothing in this =rdinance shall apply to the preparation o" accounts $y a %icro"inance institution and its audit in respect o" any accounting year which has e9pired prior to the co%%ence%ent o" this =rdinance+ and notwithstanding the other pro!ision o" this =rdinance such accounts shall $e prepared+ audited and su$%itted in accordance with the law in "orce i%%ediately $e"ore such co%%ence%ent( Returns: Sec 5 4 %icro"inance institution shall "urnish to the :tate Bank such returns+ reports and in"or%ation as %ay $e prescri$ed( <ithout li%itation to the "oregoing+ a %icro"inance institution shall+3a8 -aintain a register o" its %e%$ers+ Board o" 'irectors and the chie" e9ecuti!e o""icer and pro!ide in"or%ation thereo" to the :tate Bank at such ti%e and in such %anner as %ay $e prescri$edJ 3$8 -aintain accounts and ha!e the sa%e audited at such ti%e and in such %anner as %ay $e prescri$edJ su$%it its annual report and audited accounts to the :tate Bank and pu$lish the sa%e "or general in"or%ation at such ti%e and in such %anner as %ay $e prescri$edJ and 3d8 /urnish to the :tate Bank such particulars with regard to accounts and other records as the :tate Bank %ay "ro% ti%e to ti%e re*uire( #he :tate Bank+ or any o""icer duly authori2ed $y it in this $ehal"+ %ay at all reasona$le ti%es inspect the $ooks o" account and other records o" a %icro"inance institution+ the securities+ cash and other properties held $y such institution+ and all docu%ents relating thereto( 7e(ositors3 (rotection %und: Sec 318 4 %icro"inance institution shall+ as re*uired $y the :tate Bank+ esta$lish and %aintain depositorsE protection "und or sche%e "or the purpose o" pro!iding security or guarantee to persons depositing %oney in such institution( 116 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU /i!e per cent o" the annual a"ter ta9 pro"its o" a %icro"inance institution and pro"its earned on the in!est%ents o" the "und shall $e credited to the depositorsE protection /und and such "und shall either $e in!ested in >o!ern%ent securities or deposited with :tate Bank in a re%unerati!e account( #he depositorsE protection "und shall $e used to %ake pay%ent to the indi!idual depositors with aggregate deposits o" up to ten thousand rupees in case o" li*uidation o" the %icro"inance institution( #he depositorsE protection "und shall $e operati!e with e""ect "ro% the e9piry o" "i!e years "ro% the date o" "irst 4nnual Balance :heet o" the %icro"inance institution and shall re%ain unencu%$ered at all ti%es( /o'er to call %or in%ormation: Sec !8 <here it appears to the :tate Bank that a person is carrying on the $usiness o" a %icro"inance institution in contra!ention o" section 7+ the :tate Bank %ay& ;a<C 'irect such person or any other person who is+ or has at any ti%e+ $een dealing+ doing $usiness or associating in any %anner with such person+ to gi!e or "urnish to the :tate Bank within a speci"ied period such $ooks+ accounts+ in"or%ation+ docu%ents or records as %ay $e within the custody+ possession or control o" such personJ ;b<C 4uthori2e any person to enter and search any pre%ises and sei2e $ooks+ accounts or other docu%ents or records relating to such $usinessJ ;c<C ,nspect and e9a%ine any o" the $ooks+ accounts+ docu%ents or records re"erred to in clause 3a8J and ;d<C )9ercise as "ar as %ay $e applica$le the powers con"erred on the :tate Bank under section @@( ?ns(ection and investigation: Sec ! ; < #he :tate Bank %ay+ at any ti%e+ inspect $ooks o" accounts and records o" any %icro"inance institution to e!aluate its "inancial !ia$ility and %ay+ o" its own or on receipt o" co%plaint in!estigate the a""airs o" such institution( ;!< #he inspection or in!estigation shall $e carried out $y such o""icer o" the :tate Bank or $y such other person as the :tate Bank %ay authori2e( ;*< ,t shall $e the duty o" e!ery o""icer and e%ployee o" a %icro"inance institution or any other person dealing with or connected with the operations o" the %icro"inance institution to produce to any o""icer+ %aking an inspection or in!estigation under this section ;1< #he inspecting o""icer %ay e9a%ine on oath any o""icer or e%ployee o" the %icro"inance institution in relation to its $usiness and %ay ad%inister an oath accordingly( ;0< #he :tate Bank shall supply to the %icro"inance institution a copy o" its report on the inspection %ade under this section( ;.< #he :tate Bank shall syste%atically %onitor and e!aluate the per"or%ance o" a %icro"inance institution to ensure that it is co%plying with the applica$le criteria and prudential rules and regulations& /o'ers to give directions: Sec !! <here the :tate Bank is satis"ied that+ ;a<C ,n the pu$lic interestJ or ;b<C #o pre!ent the a""airs o" a %icro"inance institution $eing conducted in a %anner detri%ental to the interest o" the depositors or in a %anner preDudicial to the interest o" a %icro"inance institutionJ or ;c<C ,n "urtherance o" %onetary or "inancial sector policyJ ;d<C #o secure the proper %anage%ent o" a %icro"inance institution+ it is necessary to issue directions to %icro"inance institutions generally or to any %icro"inance institution in particular+ it %ay+ "ro% ti%e to ti%e+ issue such directions as it %ay dee% "it and the %icro"inance institutions or the %icro"inance institution+ as the case %ay $e+ shall co%ply with such directions( Copyright Virtual ni!ersity o" Pakistan 117
Banking Laws and Practices-BNK 601 VU #he :tate Bank %ay+ on representation %ade to it or o" its own %otion+ %odi"y or cancel any direction issued under su$section 318+ and in so %odi"ying or canceling any direction %ay i%pose such condition+ as it thinks "it+ su$Dect to which the %odi"ication or cancellation shall ha!e e""ect(
/enalties: Sec !* <hoe!er carries on the $usiness o" a %icro"inance institution without ha!ing $een licensed to do so or who carries on such $usiness a"ter the license there"ore has $een suspended or cancelled shall $e punished with i%prison%ent "or a ter% which shall not $e less than "i!e years( 4ny person who will"ully withholds or "ails to deli!er any docu%ent or in"or%ation or %akes a state%ent in any return+ $alance sheet or other docu%ent or in any in"or%ation re*uired or "urnished under+ or "or the purpose o" any pro!ision o"+ this =rdinance which to the knowledge o" such person is "alse in any %aterial respect+ shall $e punisha$le with i%prison%ent "or a ter% which %ay e9tend to one year+ or with "ine which %ay e9tend to one hundred thousand rupees+ or with $oth( 4ny person who contra!enes any other pro!ision o" this =rdinance or does not co%ply with any re*uire%ent o" this =rdinance or any rule+ regulation+ order+ instruction+ condition %ade+ gi!en or i%posed hereunder shall $e lia$le to such "ine as the :tate Bank %ay+ "ro% ti%e to ti%e deter%ine( ," any o""icer o" a %icro"inance institution+ %is%anages the a""airs o" the %icro"inance institution or %isuses his position "or gaining direct or indirect $ene"it "or hi%sel" or any o" his "a%ily %e%$ers+ he shall $e punisha$le with i%prison%ent "or a ter% which %ay e9tend to three years and shall also $e lia$le to "ine which %ay e9tend to one hundred thousand rupees+ and shall $e ordered+ $y the court trying the case+ to deli!er or Contd(( or re"und within a ti%e to $e "i9ed $y the court any property ac*uired or gained $y hi% in his own na%e or in the na%e o" his "a%ily %e%$ers $y using his position or+ in de"ault+ to su""er "urther i%prison%ent "or a ter% which %ay e9tend to si9 years( 4 %icro"inance institution+ which "ails to %aintain li*uid assets and reser!es in accordance with the pro!isions o" this =rdinance+ shall $e punished with a "ine e*ui!alent to one per cent o" the short"all "or e!ery day in which the "ailure occurs( Continuance o% c)arge and (riorit#: Sec !1 <here a charge o!er any property has $een+ or is+ created $y any person in "a!our o" a %icro"inance institution to secure any o" the ser!ices e9tended $y the %icro"inance institution to such person+ such charge shall continue to re%ain !alid and shall %aintain its priority in "a!our o" the %icro"inance institution against all charges created $y such person in "a!our o" any other person su$se*uent to the original date o" registration o" such charge( Restrictions on removal o% records and documents: Sec !0 No %icro"inance institution shall re%o!e "ro% the speci"ied area+ to a place outside the speci"ied area+ any o" its records and docu%ents relating to its $usiness without the prior per%ission in writing o" the :tate Bank( Non+disclosure o% in%ormation: Sec !. 318 )9cept as otherwise re*uired under this =rdinance+ no in"or%ation or data pro!ided $y a person+ applying to the %icro"inance institution "or "inancial assistance or any other ser!ice+ shall $e disclosed or used $y any o""icer or e%ployee o" the %icro"inance institution "or any purpose other than the purpose "or which it was intended( 3@8 <hoe!er contra!enes any o" the pro!isions o" su$-section 318 shall $e guilty o" an o""ence punisha$le with i%prison%ent "or a ter% which %ay e9tend to si9 %onths or with "ine which %ay e9tend to one hundred thousand rupees+ or with $oth( "alse in%ormation: Sec !5 118 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU <hoe!er in any application "or o$taining assistance or in any $alance sheet+ state%ent o" pro"it and loss+ declaration or any other docu%ent su$%itted to the %icro"inance institution "or the purpose o" o$taining any "inancial aid sought or granted under this =rdinance+ will"ully %akes "alse state%ent or knowingly per%its any "alse state%ent to $e %ade or to re%ain+ or uses or per%its to $e used any "inancial "acility "or any purpose other than that "or which it is granted $y the %icro"inance institution shall $e punisha$le with i%prison%ent "or a ter% which %ay e9tend to si9 %onths+ or with "ine which %ay e9tend to one hundred thousand rupees+ or with $oth( CogniHance o% o%%ences: Sec !6 No court shall take cogni2ance o" an o""ence under this =rdinance e9cept on co%plaint in writing %ade $y an o""icer o" the :tate Bank authori2ed in this $ehal"( Notwithstanding anything in the Code o" Cri%inal Procedure+ 1C5C 34ct V o" 1C5C8+; < No court other than that o" a Audicial -agistrate o" the "irst class shall try an o""ence under this =rdinanceJ and ;!< ,t shall $e law"ul "or the Audicial -agistrate to pass any sentence authori2ed $y this =rdinance( ?ndemnit#: Sec !No suit or other legal proceeding shall lie against the /ederal >o!ern%ent+ the :tate Bank or any o""icer o" the /ederal >o!ern%ent or the :tate Bank "or anything which is in good "aith done+ or intended to $e done+ under this =rdinance or o" any rules+ regulations or orders %ade hereunder( /o'er to ma$e rules: Sec *8 #he :tate Bank %ay+ with the appro!al o" the /ederal >o!ern%ent+ $y noti"ication inJ the o""icial >a2ette+ %ake rules "or carrying out the purposes and pro!isions o" this =rdinance( ,n particular+ and without preDudice to the generality o" the "oregoing power+ such rules %ay pro!ide "or all or any o" the "ollowing %atters+ na%ely&:peci"ying the portion o" pro"its+ i" any and other inco%e o" a %icro"inance institution re*uired to $e utili2ed to pro%ote the o$Decti!e o" the %icro"inance institutionJ ;egarding the ter% and conditions "or pro!iding %icro"inance ser!ices to $e e9tended $y %icro"inance institutionsJ ;a<C ;egarding in!est%ents in s%all $usiness and such cottage industriesJ ;b<C ;egarding in!est%ents in cottage industries and inco%e-generating proDects "or poor personsJ ;c<C :peci"ying criteria "or operation in the speci"ied areaJ ;d<C ;egarding capitali2ationJ ;e<C ;egarding the "or%s+ "ees and procedures "or licensingJ ;%<C :peci"ying principles o" good go!ernanceJ ;g<C ;egarding audit+ accounts+ and returns to $e "iled $y %icro"inance institutionsJ and ;)<C ;egarding li*uidity and reser!e re*uire%ents( /o'er to ma$e regulations: Sec * #he :tate Bank %ay %ake regulations+ not inconsistent with the pro!isions o" this =rdinance and the rules+ to pro!ide "or all %atters "or which pro!ision is necessary or e9pedient "or the purpose o" gi!ing e""ect to the pro!isions o" this =rdinance and e""icient conduct o" the a""airs o" a %icro"inance institution( Removal o% di%%iculties :u$Dect to su$-section 3@8+ i" any di""iculty arises in gi!ing e""ect to any o" the pro!isions o" this =rdinance+ the /ederal >o!ern%ent %ay %ake such order+ not inconsistent with the pro!isions o" this =rdinance+ as %ay appear to it to $e necessary "or the purpose o" re%o!ing the di""iculty( No order under su$-section 318 shall $e %ade a"ter e9piry o" two years "ro% the co%%ence%ent o" this =rdinance( T)e Cor(orate and ?ndustrial Restructuring Cor(oration Ordinance, !888C Copyright Virtual ni!ersity o" Pakistan 119
Banking Laws and Practices-BNK 601 VU #his =rdinance %ay $e called the Corporate and ,ndustrial ;estructuring Corporation =rdinance+ @000( ,t e9tends to the whole o" Pakistan( ,t shall co%e into "orce at once( 7e%initions ;a<C JAdministration CommitteeJ %eans the ad%inistration co%%ittee esta$lished under section 1@ J ;b<C J&oardJ %eans the Board o" directors constituted under section 6 J ;c<C M$ondsM %eans $onds+ de$entures+ participation ter% certi"icates+ ter% "inance certi"icates+ redee%a$le capital certi"icates o" si%ilar instru%ents pro!iding "or scheduled or contingent pay%ent o" de$t o$ligations J ;d<C Jboo$ valueJ %eans the rupee a%ount+ inclusi!e o" principal and accrued pro"it+ owed $y any o$ligor in connection with any "inancial asset as re"lected on the $ooks and records o" the "inancial institution+ as o" the trans"er date J ;e<C JC)airmanM %eans the chair%an o" the Board J ;%<C JC)ie% EBecutiveJ %eans the Chie" )9ecuti!e =""icer o" the Corporation ;g<C JcollateralJ %eans any asset+ property+ right+ clai%+ entitle%ent+ share undertaking+ guarantee+ agree%ent+ docu%ent or instru%ent+ security interest+ charge+ %ortgage+ lien+ hypothecation+ pledge or assign%ent in respect o" or as security "or any "inancial asset J ;)<C JCommissionM %eans the :ecurities and )9change Co%%ission o" Pakistan esta$lished under section ? o" the :ecurities and )9change Co%%ission o" Pakistan 4ct+ 1556 3SL,, o" 15568 J ;i<C JCor(orationM %eans the Corporate and ,ndustrial ;estructuring Corporation esta$lished under section 7 J ;j<C MdirectorJ %eans a director o" the Board J ;$<C J%inancial assetJ %eans any short+ %ediu% or long ter% interest and non-interest $earing loan+ "inance+ ad!ance+ lease-install%ent+ ter% "inance certi"icate+ participation ter% certi"icate+ %usharaka+ %odara$a+ pro"it and loss sharing agree%ent+ redee%a$le capital+ guarantee or contractual right to recei!e pay%ent o" %oney in respect o" su%s ad!anced or co%%itted to an o$ligor $y a "inancial institution including collateral pertaining thereto J ;l<C J%inancial institutionM %eans any $ank or other "inancial institution operating in Pakistan wherein the /ederal >o!ern%ent holds o!erwhel%ing e*uity in e9cess o" eight-"i!e per cent as speci"ied in the :chedule J ;m<C JGovernment entit#J %eans any -inistry+ 'i!ision+ 'epart%ent or o""ice o" the /ederal >o!ern%ent or any corporation+ co%pany+ trust+ statutory $ody or other entity o" which %ore than "i"ty per cent o" the e*uity or $ene"icial interest is directly or indirectly owned or controlled $y the /ederal >o!ern%ent J ;n<C Jnon+(er%orming assetJ %eans any "inancial asset & <hich is held as an asset on the $ooks o" a "inancial institution( <ith respect to which the o$ligor has $een in arrears on any pay%ent o$ligation "or a period %ore than three hundred and si9ty-"i!e days+ includingcollateral with respect to any "inancial asset+ and a whole or partial right or interest o" a "inancial institution in any "inancial asset+ that otherwise constitutes a non-per"or%ing asset including a "inancial asset with respect to which the "inancial institution has an ongoing "unding o$ligationJ and <ith respect to which the o$ligorHs outstanding pay%ent o$ligation to any "inancial institution e9ceeds ten %illion rupees or %oreJ ;o<C JobligorJ %eans any indi!idual+ proprietorship concern+ co%pany or other $ody corporate+ trust+ partnership or other entity that has+ with respect to a non-per"or%ing asset+ a contractual or legal o$ligation or duty to %ake pay%ent+ e""ect per"or%ance+ pro!ide security+ or collateral with respect to any "inancial asset whether as principal+ surety+ guarantor or otherwise and whether such o$ligation is pri%ary+ secondary+ %atured or contingent J ;(<C Joutstanding amountJ %eans the $ook !alue o" a non-per"or%ing asset o" the "inancial institution less& 3a8 4ny a%ount on the $ooks o" the "inancial institution appearing as a speci"ic reser!e applica$le to that non-per"or%ing assetJ 120 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU 3$8 any a%ount on the $ooks o" the "inancial institution appearing in a general loan loss and.or other reser!e applica$le to that non-per"or%ing asset J and i"+ in the opinion o" the Board+ the $ook !alue o" the non-per"or%ing asset+ as adDusted in su$-clauses 3a8 and 3$8+ is higher than the esti%ated %arket price o" the non-per"or%ing asset+ the Board shall co%%ission an independent e!aluator to deter%ine such %arket price and in the e!ent that the %arket price as deter%ined $y the independent e!aluator is lower than the $ook !alue as adDusted in su$-clauses 3a8 and 3$8+ such %arket price shall $e dee%ed to $e the outstanding a%ount ;:<C JregulationsJ %eans regulations %ade under this =rdinance J ;r<C JrulesM %eans rules %ade under this =rdinance J ;s<C JSc)eduleM %eans the :chedule to this =rdinance J and ;t<C MState &an$M %eans the :tate Bank o" Pakistan( Establis)ment o% t)e Cor(oration: Sec 1 4 corporation called the Corporate and ,ndustrial ;estructuring Corporation is here$y esta$lished "or carrying out the purposes o" the =rdinance( #he Corporation shall $e a $ody corporate ha!ing a co%%on seal with powers+ su$Dect to the pro!isions o" the =rdinance+ to hold and dispose o" property and shall $y its na%e sue and $e sued( #he head*uarters o" the Corporation shall $e ,sla%a$ad or such other place as %ay $e deter%ined $y the Board( &oard and its (o'ers: Sec 0 #he o!erall direction+ %anage%ent+ control and superintendence o" the a""airs o" the Corporation shall !est in the Board which %ay e9ercise all such powers and do all such acts and things as %ay $e e9ercised and done $y the Corporation as set out in section 1C( ,n discharging its "unctions+ the Board shall act with prudence and sound $usiness and "inancial considerations "or and on $ehal" o" all persons who ha!e $ene"icial interest as creditors or otherwise are $ene"iciaries+ including the "inancial institutions and >o!ern%ent entity( Com(osition o% t)e &oard: Sec . #he Board shall consist o" the "ollowing directors+ na%ely&3a8 #he -inister "or /inance+ >o!ern%ent o" PakistanJ 3$8 #he -inister o" Co%%erce and ,ndustry+ >o!ern%ent o" PakistanJ 3c8 #he >o!ernor+ :tate Bank o" PakistanJ 3d8 #he Chair%an+ Pri!ati2ation Co%%ission o" Pakistan 3e8 #he :ecretary >eneral+ -inistry o" /inanceJ 3"8 #he Chie" )9ecuti!e as de"ined in clause 318 o" section @ J and 3g8 4 %ini%u% o" "our and a %a9i%u% o" eight persons o" repute "ro% the pri!ate sector and as "ar as possi$le "ro% each Pro!ince - one o" who% shall $e "ro% the $anking sector( #he directors re"erred to in clauses 3a8 to 3"8 o" su$-section 318 shall $e e9-o""icio directors( #he directors under clause 3g8 o" su$-section 318 shall $e appointed $y the /ederal >o!ern%ent+ who shall hold o""ice "or a ter% o" two years and shall $e eligi$le "or re-appoint%ent "or additional ter%s o" two years each( No act or proceedings o" the Board shall in!alid %erely on the ground o" the e9istence o" any !acancy in or de"ect in the constitution o" the Board( No director shall ha!e any direct or indirect "inancial interest in or ha!e $usiness connection with any o$ligor or "inancial institution whose non-per"or%ing assets are the su$Dect o" this =rdinance( #he director shall not+ "or two years a"ter the e9piry o" their ter% o" o""ice+ enter into the e%ploy%ent o" or accept any ad!isory or consultancy relationship with any o$ligor or "inancial institution whose nonper"or%ing assets are the su$Dect o" this =rdinance( C)ie% EBecutive o% t)e Cor(oration: Sec 6 #he Chie" )9ecuti!e shall $e appointed $y the /ederal >o!ern%ent who shall $e the whole ti%e Chie" )9ecuti!e =""icer o" the Corporation( Copyright Virtual ni!ersity o" Pakistan 121
Banking Laws and Practices-BNK 601 VU #he Chie" )9ecuti!e shall hold o""ice "or a ter% o" two years and shall $e eligi$le "or re-appoint%ent "or additional ter%s o" two years each( :u$Dect to its superintendence+ direction and control the Board %ay authori2e in writing the Chie" )9ecuti!e to e9ercise and per"or% any or all o" the "ollowing (o'ers and %unctions as the Board dee%s "it+ na%ely &*C ;a<C #o deal with+ negotiate+ enter into and sign agree%ents and contracts with any o$ligor or "inancial institution in respect o" the non-per"or%ing assets or related collateral and to take any and all actions+ in any %anner to ad!ance the $usiness o" the Corporation as speci"ied in section 1CJ ;b<C #o institute+ "inance+ %anage+ o!ersee and ter%inate reha$ilitation plans and sche%es "or the nonper"or%ing assets or the o$ligor+ as the case %ay $eJ ;c<C #o pay the cost+ charges and e9penses "or the day to day $usiness o" the CorporationJ ;d<C #o recei!e %oney or goods on $ehal" o" the CorporationJ ;e<C #o sell+ deal in and dispose o" all articles and goods o" the CorporationJ ;%<C to engage+ e%ploy+ "i9 and pay the re%uneration and dis%iss or discharge all %anagers+ agents+ secretaries+ clerks+ ser!ants+ work%en and other persons e%ployed in or in connection with the Corporations $usiness J ;g<C #o appoint any person or persons to $e attorney or attorneys o" the Corporation "or such purposes and with such powers authorities and discretionHs and "or such period and su$Dect in such conditions as he %ay "ro% ti%e to ti%e think "itJ ;)<C #o %ake and gi!e receipt+ release and discharge all %oneys paya$le to the Corporation or "or the clai%s and de%ands o" the CorporationJ ;i<C #o draw+ accept+ endorse and negotiate all such che*ues+ $ills o" e9change+ pro%issory notes and >o!ern%ent and other securities as shall $e necessary in or "or carrying on the a""airs o" the Corporation whether the account %ay $e o!erdrawn or not J ;j<C #o institute+ co%pro%ise+ withdraw or a$andon any legal proceedings $y or against the Corporation or its o""icers or otherwise concerning the a""airs o" the CorporationJ ;$<C #o pro!ide "or the wel"are o" e%ployees or e9-e%ployees o" the Corporation and the wi!es+ widows or "a%ilies or the dependants o" such persons in such %anner as he %ay thing "it J ;l<C #o open+ %aintain and operate accounts or letters o" credit "or any a%ount with any $ank or $anks and to gi!e instructions "or operation o" such accountsJ ;m<C #o appear $e"ore any court law+ ci!il+ cri%inal+ re!enue+ e9cise+ inco%e-ta9 including $anking courts and tri$unals esta$lished "or reco!ery o" $ank dues and loans+ whether original or appellate+ 1igh Courts and :upre%e Court o" Pakistan and other authorities "or and on $ehal" o" the Corporation and to institute+ apply "or trans"er o" suits and other proceedings+ conduct+ prosecute and de"end ;n<C to enter into all such negotiations and contracts and rescind or !ary all such contracts and do all acts+ deeds and things in the na%e and on $ehal" o" the Corporation as he %ay consider necessary+ e9pedient or proper+ or in relation to any o" the %atters a"oresaid or otherwise+ "or the purposes o" the Corporation J ;o<C #o gi!e e""ectual discharge "or %oneys paya$le to the Corporation and "or its clai%s and de%ands
122
Banking Laws and Practices-BNK 601 VU ;(<C to purchase or take on lease or otherwise ac*uire "or the Corporation+ land+ $uildings+ rights and pri!ileges "or its purpose o" o""ices or pre%ises o" the Corporation at such prices and generally on such ter%s as he %ay think necessary and e9pedient+ to $uild+ alter and "urnish o""ices+ houses or pre%ises and let or su$-let any such houses or pre%ises in portion or otherwise ;:<C to de%and and en"orce pay%ent+ deli!ery+ trans"er o" any dues "or reco!ery and recei!e "ro% all and e!ery persons+ $ody corporate or corporations+ "ir% or co%panies whatsoe!er+ all %oney+ securities "or %oney+ de$ts and clai%s o" all kinds and de%and+ en"orce+ deli!er and recei!e and take possession o" %oney+ securities+ shares+ and goods produced and property o" all kinds whether $elonging to the Corporation as security or in trust or held $y any person or co%pany in trust or $y way o" security "or the Corporation ;r<C to deal with+ %ake arrange%ents+ sign contracts with >o!ern%ent+ se%i >o!ern%ent+ autono%ous $odies+ corporations+ local >o!ern%ent and other institutions J and ;s<C #o appoint attorneys+ agents+ %anagers and authori2e the% to e9ercise any or all such powers and "unctions as are %entioned in clauses 3a8 to 3r8 a$o!e( 1C #he /ederal >o!ern%ent %ay+ $y noti"ication in the o""icial >a2ette re%o!e the Chie" )9ecuti!e i"+ -;a<C 1e re"uses or "ails to discharge or $eco%es in the opinion o" the /ederal >o!ern%ent+ incapa$le o" discharging his responsi$ilities under this =rdinanceJ or ;b<C 1e has $een declared insol!entJ or ;c<C 1e has $een declared to $e dis*uali"ied "or e%ploy%ent in or has $een dis%issed "ro% the ser!ice o" Pakistan+ or has $een con!icted o" an o""ence in!ol!ing %oral turpitude J or ;d<C 1e has knowingly ac*uired or continued to hold without the per%ission in writing o" the /ederal >o!ern%ent+ directly or indirectly or through a partner any share or interest in any o$ligator or "inancial institution( Committees: Sec #he Board %ay+ "or the purpose o" o$taining ad!ice and assistance in carrying out the purposes o" this =rdinance+ constitute one or %ore co%%ittees consisting o" %e%$ers o" the Board and any other suita$le persons as it %ay dee% "it( 4ny co%%ittee so "or%ed shall+ in e9ercise o" the powers delegated to it or con"erred on it( Con"or% to any restrictions that %ay $e i%posed on it $y the Board( Veri%ication Committees: Sec 8 /or the purposes o" this =rdinance and $e"ore taking any action there under+ the Corporation shall+ ha!ing regard to the "acts and circu%stances o" the case+ re"er a *uestion o" $ona "ide dispute relating to lia$ility o" the o$ligor in respect o" the non-per"or%ing assets or cases relating thereto+ including the cases o" "raud+ %isrepresentation+ and $reach o" any pro!ision o" law+ rule+ regulation and circulars o" the :tate Bank+ Contd\( ;egarding the calculation+ e9istence and repay%ent o" a "inancial o$ligation or outstanding loan+ %arkup or interest clai%ed against an o$ligor+ to the >o!ernor :tate Bank "or !eri"ication and correct deter%ination and calculation $y the Veri"ication Co%%ittee as herea"ter pro!ided& #he !eri"ication+ deter%ination and calculation o" %atters re"erred to in su$-section 318 shall $e %ade in accordance with the e9isting law+ rules+ regulations and circulars o" the :tate Bank in the %anner pro!ided herein in regard to the principal a%ount o" loan+ %ark-up+ as clai%ed $y or against the "inancial institution or the Corporation+ as the case %ay $e+ in respect o" the non-per"or%ing assets and the lia$ility o" the o$ligor( :a!e as pro!ided in this =rdinance+ the pro!isions o" su$-sections 318 and 3@8 shall not a""ect the !alidity+ continuance and en"orce%ent o" an order o" winding-up o" a co%pany under the Co%panies =rdinance+ 15C7+ which has $een %ade $e"ore the co%%ence%ent o" this =rdinance e9cept "or the purpose o" calculating the pay%ent o" any "inancial o$ligation or !eri"ied clai% to the creditor or contri$utory or lia$ility o" the guarantor or any other person( <here a %atter is re"erred to the >o!ernor :tate Bank under su$-section 318 and 3@8+ he %ay constitute one or %ore Veri"ication Co%%ittees "or the purposes o" this =rdinance( #he Veri"ication Co%%ittee shall consist o" a no%inee o" the >o!ernor :tate Bank $eing a senior o""icer o" the :tate Bank who shall $e the Chair%an o" the Co%%ittee+ two Chartered 4ccountants+ to $e no%inated $y the >o!ernor :tate Copyright Virtual ni!ersity o" Pakistan 123
Banking Laws and Practices-BNK 601 VU Bank and one Chartered 4ccountant to $e no%inated $y the Council o" the ,nstitute o" Chartered 4ccountants o" Pakistan+ Karachi+ such no%ination to $e o$tained $y the >o!ernor :tate Bank and such other person as the Corporation %ay re*uire( #he Chair%an o" the Veri"ication Co%%ittee shall con!ene the %eetings+ conduct proceedings o" the Co%%ittee+ and %aintain record including the e!idence su$%itted $e"ore hi% $y the parties and their state%ents and on their re*uest supply authenticated copies o" the record to the%( #he Veri"ication Co%%ittee a"ter e9a%ination o" the record o" the concerned lending "inancial institution and the o$ligor and a"ter due notice $y courier ser!ice+ "a9+ (-(:( or any other e""ecti!e %ode to $oth parties and a""ording the% reasona$le opportunity to e9plain their position and hearing the% in person and through lia$ility and %atters re"erred to in su$-sections 318+ 3@8 and 3?8 in accordance with the law+ rules+ regulations and circulars o" the :tate Bank( ;6< <here a party a"ter due notice under su$-section 368 does not appear in person or through chartered accountant $e"ore the Veri"ication Co%%ittee+ it %ay proceed e9-parte( ;-< Pro!ided that nothing contained herein shall pre!ent such party "ro% appearance $e"ore the Veri"ication Co%%ittee $e"ore the conclusion o" the proceedings( ; 8< #he Veri"ication Co%%ittee shall su$%it its "inding and report with reco%%endations to the >o!ernor :tate Bank within thirty days o" the co%%ence%ent o" the proceedings or such e9tended period as the >o!ernor :tate Bank %ay allow "or reasons to $e recorded in writing( ; <#he >o!ernor :tate Bank shall consider the "indings and report and reco%%endations su$%itted to hi% $y the Veri"ication Co%%ittee under su$-section 358 and %ay accept or %odi"y the sa%e or %ay+ "or reasons to $e recorded+ %ake such other appropriate reco%%endations and "indings in respect thereo" as he %ay dee% "it( ; !< #he >o!ernor :tate Bank shall "orward his reco%%endations and "indings %ade under su$-section 3108 along with the "inding+ report+ reco%%endations and record o" the Veri"ication Co%%ittee to the Corporation and the parties will $e entitled to o$tain copies thereo" "ro% the Corporation( ; *< #he reco%%endations and "inding o" the >o!ernor :tate Bank %ade on the $asis o" "inding+ report and reco%%endations o" the Veri"ication Co%%ittee in regard to calculation o" lia$ility o" o$ligor shall $e "inal and ha!e presu%ption o" truth unless "ound to contain %ani"est error or contrary to law+ $ut the sa%e shall $e su$Dect to orders o" the 1igh Court( ; 1< #he Corporation a"ter considering the reco%%endations and "indings o" the >o!ernor :tate Bank "orwarded to it under su$-section 3118 will take appropriate action under this =rdinance ha!ing regard to the "acts o" each case( ; 0< ,n the e!ent o" "ailure either o" the Veri"ication Co%%ittee to conclude the re"erence within thirty days o" the co%%ence%ent o" the proceeding+ or such e9tended period re"erred to in su$-section 358 or the "ailure o" the o$ligor or the "inancial institution to accept the reco%%endations and "indings o" the >o!ernor :tate Bank+ the Corporation %ay proceed in respect o" the non-per"or%ing asset under this =rdinance ; .< Notwithstanding anything contained in any other law "or the ti%e $eing in "orce+ the "inal reco%%endations and "indings $y the >o!ernor :tate Bank and the "inding+ report and the reco%%endations o" the Veri"ication Co%%ittee under su$-section 3118 shall constitute ad%issi$le e!idence "or any legal proceedings( ; 5< )9planation( - /or the purpose o" this =rdinance any instructions gi!en $y the :tate Bank to any $ank or "inancial institution "or writing o"" any de$t "or the purpose o" accounting o" any such $ank or "inancial institution shall not $e construed as satis"action o" any de$t paya$le $y the o$ligor( Guidelines %or Cor(oration and t)e Governor State &an$: Sec #he Corporation and where a %atter is re"erred $y it to >o!ernor :tate Bank under su$-section 318 o" section 10+ the >o!ernor :tate Bank+ shall take into consideration inter-alia the "ollowing "actors as the Corporation+ or as the case %ay $e+ the >o!ernor :tate Bank+ %ay dee% "it ha!ing regard to the "acts o" each case+ na%ely &124 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU ;a<C #he practical possi$ilities o" the non-per"or%ing assetJ ;b<C #he possi$ility o" re-scheduling o" "inancial assistanceJ ;c<C #he ade*uacy o" the su$sisting securities and the willingness o" the o$ligor to pro!ide su""icient additional securityJ ;d<C :uch other pre!enti!e+ a%eliorati!e and re%edial %easures including a%alga%ation or %erger+ change in %anage%ent whether partial or whole or such incidental+ conse*uential or supple%ental %easures as %ay $e necessaryJ ;e<C e9a%ine the possi$ility o" keeping ali!e a running proDect $y pro!iding reasona$le "inancial assistance through "inancial institutions keeping in !iew the interest o" $oth $orrower and lender and a!oiding une%ploy%ent J ;%<C where the o$ligor can %ake "inancial arrange%ent on a Doint !enture $asis with a third person on %utually agreed ter%s so as to pro!ide su""icient security to the satis"action o" the >o!ernor :tate Bank or the Board "or repay%ent o" the outstanding a%ount or lia$ility o" the non-per"or%ing asset to $e deter%ined in accordance with the :tate BankHs circulars+ instructions+ rules+ regulations and the law J and ;g<C 4ny other "acts and circu%stances ha!ing regard to pu$lic interest and the o$Decti!es o" the =rdinance( Quali%ications and dis:uali%ications o% directors: Sec 0 No person shall $e or shall continue to $e a director who ,s or at any ti%e has $een adDudicated as insol!entJ ,s "ound to $e a lunatic or $eco%es o" unsound %indJ ,s or has at any ti%e $een con!icted o" any o""ence which+ in the opinion o" the /ederal >o!ern%ent+ is an o""ence in!ol!ing %oral turpitudeJ 3d8 a$sents hi%sel" "ro% all the %eetings o" the Board+ without lea!e o" a$sence "ro% the Board+ "or a continuous period o" si9 %onths or+ i" less than three %eetings are held within such period+ "ro% three consecuti!e %eetings o" the Board J and 3e8 ,s a salaried o""icial o" the Corporation either than the Chie" )9ecuti!eR Em(lo#ees o% t)e Cor(oration to be (ublic servants: Sec . )!ery person in the ser!ice o" the Corporation shall+ when acting or purporting to act in pursuance o" any o" the pro!isions o" this =rdinance is dee%ed to $e a pu$lic ser!ant within the %eaning o" section @1 o" the Pakistan Penal Code 1C60( Business ')ic) t)e Cor(oration can transact: Sec 6 <ithout preDudice to the pro!isions o" any other law "or the ti%e $eing in "orce and su$Dect to the pro!isions o" this =rdinance+ the Corporation %ay e9ercise powers and "unctions as under &;a<C #o ac*uire+ purchase+ hold+ %anage+ restructure+ reha$ilitate+ sell and dispose o" non-per"or%ing assets J ;b<C #o ac*uire+ purchase+ %anage+ restructure+ reha$ilitate+ sell and dispose o" any o$ligor $eing a corporation or a co%panyJ ;c<C to purchase+ take o!er+ own+ hold+ sell+ lease+ arrange "inance "or+ %anage+ dispose o"+ reorgani2e+ restructure+ reha$ilitate and otherwise+ enter into any settle%ent or contract+ reali2e %ortgage+ hypothecate+ control+ %anage any loan+ "inance+ ad!ance+ co%%it%ent+ lease install%ent+ sale contract or other acti!ity relating to a non-per"or%ing asset J ;d<C to purchase+ take o!er+ own+ hold+ sell+ lease+ and otherwise dispose o"+ re-organi2e+ restructure+ reha$ilitate and otherwise enter into any settle%ent or contract+ reali2e+ pledge+ %ortgage+ hypothecate+ control+ %anage+ and arrange "inance "or any asset+ property+ undertaking+ collateral or security underlying or relating to or securing any "inancial asset or instru%ent+ including any intellectual property+ trade %ark+ e*uity+ "inancial interest+ legal and contractual right+ asset+ guarantee and other undertaking J ;e<C to initiate+ take+ continue+ resist+ i%ple%ent and per"or% any and all acti!ities "or the reco!ery o" non-per"or%ing assets including "iling suits and appeals and to enter into settle%ents+ through the courts or outside+ in respect thereo" J Copyright Virtual ni!ersity o" Pakistan 125
Banking Laws and Practices-BNK 601 VU ;%<C to engage and enter into agree%ents with "inancial and other institutions+ and "inancial+ legal+ accounting+ !aluation and other specialists+ "or the purposes o" the $usiness o" the Corporation J ;g<C to purchase+ a%alga%ate+ enter into partnerships+ "or% Doint !entures+ %ake pro"it sharing arrange%ents or co-operate or participate with any co%pany or other entity "or the $usiness purposes o" the Corporation J ;)<C to sell+ i%pro!e+ %anage+ de!elop+ e9change+ %ortgage+ let or rent 3"or pro"it or royalty or otherwise8+ grant licenses+ case%ents+ options+ ser!itudeHs and other rights o!er and in any other %anner deal with or dispose the real and personal property+ assets+ rights and e""ects o" the Corporation J ;i<C to open and %aintain the CorporationHs accounts with $anks and "inancial institutions and to draw+ %ake+ endorse+ accept+ discount+ e9ecute and issue pro%issory notes+ $ills o" e9change+ $ills o" lading+ warrants+ participation ter% certi"icates and other negotia$le or trans"era$le instru%ents J ;j<C to esta$lish or pro%ote+ or concur or participate in esta$lishing any corporation or other entity whose o$Dects shall include the ac*uisition o" all or any o" the property or lia$ilities o" the Corporation or the pro%otion o" which %ay see%+ directly or indirectly+ calculated or $ene"it the Corporation J ;$<C to enter into any agree%ent with any authorities+ /ederal+ Pro!incial+ autono%ous+ se%iautono%ous+ %unicipal+ local or otherwise that %ay see% conduci!e to the CorporationsH o$Dects or any o" the%+ and to o$tain "ro% any such authority+ rights+ pri!ileges and concessions which the Corporation %ay dee% desira$le to o$tain and to carry out+ e9ercise and co%ply with any such arrange%ents+ rights+ pri!ileges and concessions J and ;l<C 4ll powers enu%erated in su$-section 3?8 o" section C entrusted to the Chie" )9ecuti!e( "inancial ?nstitutions to ')ic) t)e (rovisions o% t)is Ordinance s)all a((l#: Sec !8 #he pro!isions o" this =rdinance shall apply to "inancial institutions speci"ied in the :chedule to this =rdinance in relation to the non-per"or%ing assets as %entioned in their audited $alance sheet su$Dect to rights o" third parties( Accounts and audit: Sec !. 318 #he "inancial year o" account o" the Corporation shall $e the year co%%encing the "irst day o" Auly and ending the last day o" Aune( 3@8 :u$Dect to su$-section 310+ the Corporation shall %aintain its accounts in such %anner as the /ederal >o!ern%ent %ay+ in consultation with the 4uditor >eneral o" Pakistan prescri$e( 3?8 #he accounts o" the Corporation shall $e audited $y one or %ore auditors who are chartered accountants within the %eaning o" the Chartered 4ccountants =rdinance+ 1561 3S o" 15618+ appointed $y the Corporation( Reserve %und: Sec !5 #he Corporation shall esta$lish a reser!e "und to which shall $e credited its annual reco!eries( Annual re(ort to t)e "ederal Government: Sec !<ithin one hundred and eighty days o" the end o" each "inancial year o" the Corporation+ the Board shall prepare a presentation to the /ederal >o!ern%ent with respect to the "inancial per"or%ance and results o" operations o" the Corporation "or the preceding "inancial year and the o!erall policies and goals o" the Corporation( EBem(tion %rom taBes: Sec *1 Notwithstanding anything contained in any other law "or the ti%e $eing in "orce+ the /ederal >o!ern%ent %ay e9e%pt Corporation "ro% the pay%ent o" all or any other ta9es+ duties+ le!ies+ charges and "ees paya$le under or pursuant to any /ederal law+ on its in!est%ent+ inco%e+ assets or wealth( Rig)t o% recover# as arrears o% land revenue: Sec *5 126 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU #he Corporation shall $e entitled to reco!er all outstanding a%ounts+ su$Dect to law+ on the $asis o" and under any non-per"or%ing assets held $y the Corporation as i" they are arrears o" land re!enue under the Land ;e!enue 4ct+ 1566 3<est Pakistan 4ct SV,, o" 15668( /o'er to obtain in%ormation and documents etc Sec *6 318 #he Corporation %ay call upon any person+ authority+ agency+ $ank or "inancial institution to "urnish any in"or%ation+ docu%ents+ papers and accounts it %ay re*uire "or the purposes o" this =rdinance( 3@8 4ny person who does not or "ails to "urnish the in"or%ation+ docu%ents+ papers and accounts re*uired $y the Corporation under su$-section 510 shall $e punisha$le with i%prison%ent o" either description "or a ter% which %ay e9tend to one year+ or with "ine or+ with $oth(
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Banking Laws and Practices-BNK 601 &AN>ER+CUSTOMER RE4AT?ONSA?/
VU LESSON 20
T#(es: #here are a%ongst others the "ollowing i%portant type o" relationships $etween a $anker and his custo%er& 'e$tor and Creditor Creditor and 'e$tor Principal and 4gent Bailer and Baillie -ortgagor and -ortgagee Pledger and Pledgee &e%ore 'e move on to discuss t)e above relations)i(s 'e need to understand certain terms9conce(ts including ban$er, customer, ban$ing and ban$ing com(an#C T)e same are eB(lained in t)e %ollo'ing (aragra()sC &an$er: <ords Banker.Bank.Banking are interchangea$ly used( Banker not speci"ically de"ined( -eanings in"erences and de"initions are deri!ed "ro% in- depth study o" !arious statutes relating to $anking and writings o" renowned econo%ists and Durists( 1owe!er+ in di""erent statutes including $anking co%panyHs ordinance+ 156@+ concepts such as $usiness o" $anking."unctions o" $anks and $usiness transacted $y $anks are contained( Some o% t)e 7e%initions o% &an$er: According to @C2C Gilbert LA $anker is a dealer in capital+ or+ %ore properly+ a dealer in %oney( 1e is an inter%ediate party $etween the $orrower and the lender( 1e $orrows "ro% one party and lends to anotherG According to 7rC Aerbert 4C Aart F4 person carrying on a $usiness o" recei!ing %oney+ and collecting dra"ts "or custo%ers su$Dect to the o$ligation o" honoring che*ues drawn upon hi% "ro% ti%e to ti%e $y the custo%ers to the e9tent o" the a%ounts a!aila$le on their current accounts According to Sir @o)n /aged: ;considered as an aut)orit# on ban$ing la'< Fthat no person or $ody corporate or otherwise+ can $e a $anker+ who does not 3i8 take deposit accounts+ 3ii8 take current accounts+ 3iii8 issue and pay che*ues and 3i!8 collects che*ues crossed and uncrossed "or his custo%ersG :ir Aohn Paget "urther adds that one clai%ing to $e a $anker %ust pro"ess hi%sel" to $e one+ and the pu$lic %ust accept hi% as such+ hi %ain $usiness %ust $e that o" $anking+ "ro% which generally he should $e a$le to earn his li!ing( #his de"inition is "airly e9hausti!e+ although it %akes no %ention o" %any other i%portant "unctions o" the present day $anker+ which %ay $e put under two heads 3a8 agency ser!ices+ co%prising o" the collection o" $ills+ pro%issory notes+ coupons+ di!idends+ pay%ent o" su$scription and insurance pre%iu%s+ and 3$8 general utility ser!ices+ e(g(+ issue o" credit instru%ents+ the transaction o" "oreign e9change $usiness+ the sa"eguarding o" !alua$les and docu%ents against "ire+ the"t+ etc( there see%s to $e no dou$t that according to )nglish LawJ a person clai%ing to $e treated as a $anker+ should per"or% the "unctions as gi!en $y :ir Aohn Paget( American Version: Lb# F$ankingG we %ean the $usiness o" dealing in credits+ and $y a F$ankG we include e!ery person+ "ir% or co%pany ha!ing a place o" $usiness where credits are opened $y deposits or collection o" %oney or currency+ su$Dect to $e paid or re%itted on che*ue or order+ or %oney is ad!anced or loaned on 128 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU stocks+ $onds+ $ullion+ $ills o" e9change or pro%issory notes or where these are recei!ed "or discount or saleP United >ingdom3s Version: ;According to bills o% eBc)ange Act, 66!< LA $anker is any person who carries on the $usiness o" $ankingG According to "inance Act, - 0: F4ny person carrying on a $ona"ide $anking $usiness in the nited Kingdo% is a $anker P According to Negotiable ?nstruments Act, 66 ;according to Sec * ;b< o% Negotiable ?nstrument Act< and &CO, -.! L Banker %eans a person transacting the $usiness o" accepting "or the purpose o" lending or in!est%ent+ o" deposit o" %oney "or% the pu$lic+ repaya$le on de%and+ or otherwise or withdraw a$le $y che*ue or otherwise+ and includes any post o""ice sa!ings $ank( P ?n Aalsbur#3s 4a's o% England: Banker is de"ined as an indi!idual+ partnership or corporation+ whose sole or predo%inating $usiness is $anking+ that is+ the receipt o" %oney on current or deposit account+ and the pay%ent o" che*ues drawn $y and the collection o" che*ues paid in $y the custo%er( Conclusion: <e can say that $anker is what $anker does( ,t takes us to the $usiness o" $anking or "unctions per"or%ed $y $anks 7e%inition o% &an$ing, &an$ing Com(an# E "orms o% &usiness++ &CO, -.! Re+visited F&an$ing %eans the accepting+ "or the purpose o" lending or in!est%ent+ o" deposits o" %oney "ro% the pu$lic+ repaya$le on de%and or otherwise+ and withdraw a$le $y che*ue+ dra"t+ paya$le to order or otherwiseJ F&an$ing Com(an#P %eans any co%pany which transacts the $usiness o" $anking in PakistanJ "orms o% business carried out b# t)e ban$ing com(an# under section 5 &CO, -.!: ,n addition to the $usiness o" $anking+ a $anking co%pany %ay engage in any one or %ore o" the "ollowing "or%s o" $usiness+ na%ely&a< Borrowing+ raising+ or taking up o" %oneyJ the lending or ad!ancing o" %oney either upon or without securityJ the drawing+ %aking+ accepting+ discounting+ $uying+ selling+ collecting and dealing in $ills o" e9change+ hundies+ pro%issory notes+ coupons+ dra"ts+ $ills o" lading+ railway receipts+ warrants+ de$entures+ certi"icates+ scripts 'ealing in 3participation ter% certi"icates+ ter% "inance certi"icates+ %usharika certi"icates+ %odara$a certi"icates and such other instru%ents as %ay $e appro!ed $y the :tate Bank8 and other instru%ents+ the granting and issuing o" letters o" credit+ issuing o" tra!elerHs che*ues and circular notesJ 3aa8 the pro!iding o" "inance as de"ined in the Banking #ri$unals( b< 4cting agents "or any >o!ern%ent or local authority or any other person or personsJ the carrying on o" agency $usiness o" any description including the clearing and "orwarding o" goods+ gi!ing o" receipts and discharges and otherwise acting as an attorney on $ehal" o" custo%ers+ $ut e9cluding the $usiness o" a %anaging agent or treasurer o" a co%panyJ 3$$8 acting as F%odara$a co%panyG under the pro!ision o" the -odara$a Co%panies and -odara$a 3/loatation and Control8 =rdinance+ 15C0 3SSS, o" 15C08J c< Contracting "or pu$lic and pri!ate loans and negotiation and issuing the sa%eJ d< #he e""ecting+ insuring+ guaranteeing+ underwriting+ participating in %anaging and carrying out o" any issue pu$lic or pri!ate+ >o!ern%ent+ %unicipal or other loans or o" shares+ stock de$entures+ 3de$enture stock or other securities8V o" any co%pany+ corporation or association and the lending o" %oney "or the purpose o" any such issue e< Carrying on and transacting e!ery kind o" guarantee and inde%nity $usinessJ Copyright Virtual ni!ersity o" Pakistan 129
Banking Laws and Practices-BNK 601 VU 3ee8 purchase or ac*uisition in the nor%al course o" its $anking $usiness o" any property+ including co%%odities+ patents+ designs+ trade-%arks and copyrights with or without $uy-$ack arrange%ents $y the seller+ or "or sale in the "or% o" hire purchase or on de"erred pay%ent $asis with %ark-up or "or leaning or licensing or "or rush-sharing or "or any other %ode o" "inancingJ %< -anaging+ selling and reali2ing any property which %ay co%e into the possession o" the co%pany in satis"action or part satis"action o" any o" its clai%sJ g< 4c*uiring and holding and generally dealing with any property or any right+ title or interest in any such property which %ay "or% security or part o" the security "or any loans or ad!ances or which %ay $e connected with any such securityJ "or any loans or ad!ances or which %ay $e connected with any such securityJ )< ndertaking and e9ecuting trustsJ i< ndertaking the ad%inistration o" estates as e9ecutor+ trustee or otherwiseJ j< )sta$lishing and supporting or aiding in the esta$lish%ent and support o" associations+ institutions+ "unds+ trusts and con!eniences calculated to $ene"it e%ployees or e9-e%ployees o" the co%pany or the dependents or connections o" such personsJ granting pensions and allowances and %aking pay%ents towards insuranceJ su$scri$ing to or guaranteeing %oneys "or charita$le or $ene!olent o$Dects or "or any e9hi$ition or "or any pu$lic+ general or use"ul o$DectJ $< #he ac*uisition+ construction+ %aintenance and alteration o" any $uilding or works necessary or con!enient "or the purpose o" the co%panyJ l< :elling+ i%pro!ing+ %anaging+ de!eloping+ e9changing+ leasing+ %ortgaging+ disposing o" or turning into account or otherwise dealing with all or any part o" the property and rights o" the co%panyJ m< 4c*uiring and undertaking the whole or any part o" the $usiness o" any person or co%pany+ when such $usiness is o" a nature enu%erated or descri$ed in this su$-sectionJ n< 'oing all such other things as are incidental or conduci!e to the pro%otion or ad!ance%ent o" the $usiness o" the co%panyJ o< 4ny other "or% o" $usiness which the /ederal >o!ern%ent %ay+ $y noti"ication in the o""icial >a2ette+ speci"y as a "or% o" $usiness in which it is law"ul "or a $anking co%pany to engage( 3@8 No $anking co%pany shall engage in any "or% o" $usiness other than those re"erred to in su$-section 318 Customer 7e%ined: #he entire law relating to $anking rotates on the interplay o" "orces go!erning the relationship $etween a $anker and a custo%er( #he *uestion arises as to who %ay $e called a custo%er and it is %ost surprising that the word F Custo%erG has not $een de"ined and at the sa%e ti%e one %ust know as to who is a custo%er( ,n so%e o" the Dudg%ents pronounced $y di""erent courts an attept has $een %ade to gi!e de"initions o" a custo%er $ut it is not an e9hausti!e atte%pt and they ha!enot $een a$le to gi!e such de"inition which %ay $e ter%ed as a satis"actory de"inition o" this word( According to Aeber 4C Aart: 4 custo%er is a person who has an account with a $anker( Co%ing to the %eaning o" the word+ 1art says that a person is a Fcusto%erG o" a $ank within the %eaning o" section C@ o" the Bills o" )9change 4ct+ 1CC@+ i" he keeps either a current or a deposit account with the $ank+ or + it would see% i" the $ank syste%atically transacts with hi%+ or "or hi%+ any kind o" $anking $usiness( According to Sec * o% Negotiable ?nstruments Act, 66 ,n the a$o!e cited section a re"erence has $een %ade with regard to the Custo%er-- that protection shall $e a!aila$le to a $anker collecting che*ues on $ehal" o" his custo%er According to Sir @o)n /aget: LTo constitute a custo%er+ there %ust $e so%e recogni2a$le course o" ha$it o" dealing in the nature o" regular $anking $usinessG According to t)e judgment in t)e case cited as L4ad &ro$e V Todd ; - 1< given b# @ustice &ail Aac)e, customer3s domain is maintained as under 130 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU Fin %y opinion a person $eco%es a custo%er o" a $ank when he goes to the $ank with %oney or a che*ue and asks to ha!e an account opened in his na%e+ and the $ank accepts the %oney or che*ue and is prepared to open an account in the na%e o" that personJ a"ter that he is entitled to $e called the custo%er o" $ank( ,t is "urther added+ F, think such a person $eco%es a custo%er the %o%ent the $ank recei!es the %oney or che*ue or agrees to open an account(G 4egal Re:uirements to be :uali%ied as Customer: Custo%er should $e o" age o" %aDority should $e o" sound %ind Not de$arred under any law there %ust $e an o""er. proposal and acceptance o" that o""er. proposal( Rig)ts and 7uties o% Customer #he custo%er has the "ollowing uni!ersally accepted rig)ts: ;a< #o draw che*ues against his credit $alance+ or in the a$sence o" credit $alance+ when there are arrange%ents "or acco%%odation %ade with the $anker earlierJ ;b< #o recei!e a state%ent o" his account "ro% a $anker( ;c< #o sue the $ank "or any loss and da%ages( ;d< #o sue the $anker "or not %aintaining the secrecy o" his account( #he custo%er has the "ollowing duties towards his $anker& - 3i8 :ection 6@ o" the Negotia$le ,nstru%ents 4ct+ 1CC1+ lays down that the custo%er %ust present the che*ues "or pay%ent and collection within the $usiness hours o" his $anker( - 3ii8 :ection C7 o" the Negotia$le ,nstru%ents 4ct+ 1CC1+ lays down that the custo%er should see that the che*ues and other instru%ents are presented "or pay%ent within a reasona$le ti%e "ro% the date o" their issue( - 3iii8 1e should take reasona$le care "or sa"e custody o" the che*ue $ooks( ," a custo%er "ails in this duty+ he is to $e held responsi$le "or his negligence in lea!ing his che*ues unprotected( 3i!8 1e should draw the che*ues !ery care"ully and in such a way that there is no roo% le"t "or any "raudulent alternations and additions( ,n Iany V >rote+ the Lord Chancellor said& M4 che*ue drawn $y a custo%er is in point o" law+ a %andate to the $anker to pay the a%ount according to the tenor o" the che*ue( ,t is $eyond dispute that the custo%er is $ound to e9ercise reasona$le care in drawing the che*ue to pre!ent "ro% $eing %isled( ," he draws the che*ues in a %anner which "acilitates "raud+ he is guilty o" a $reach o" duty to hi%sel" and the $anker+ and he will $e responsi$le to the $anker "or any loss su""ered $y the $anker as a natural and direct conse*uence o" this $reach o" dutyM(
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VU LESSON 21
Nature o% 4egal Relations)i(: Basic legal relationship $etween $anker and custo%er is contractual relations)i(C #his relationship is esta$lished "ro% the ti%e o" opening an account in a $ank( #his relationship is at the root o" all other legal relationships that e9ist $etween the $anker and custo%er( 4s such+ scope+ essentials and type o" contracts ha!e $een discussed in the "ollowing paragraphs( Contract++ 7e%ined Contract is an agree%ent en"orcea$le at law( Essentials o% a Valid Contract: #o understand a contract+ we need to know what an agree%ent is( #he agree%ent has $een de"ined in section @ 3e8 o" the Contract 4ct which is gi!en $elow( Agreement )!ery pro%ise or e!ery set o" pro%ises+ "or%ing the consideration "or each other is an agree%ent( --#o understand an agree%ent+ we %ust know what a pro%ise is( #he pro%ise has $een de"ined in section @ 3$8 o" the 4ct which is reproduced $elow& /romise <hen the person to who% the proposal is %ade signi"ies his assent thereto+ the proposal is said to $e accepted( 4 proposal when accepted $eco%es a pro%ise( /ro(osal and /romise& #he word MproposalM is synony%ous in )nglish use with Mo""erM( But the language o" these de"initions appears to con"ine MproposalM to an o""er to $e $ound $y a pro%ise( #hus a %an who o""ers to sell and deli!er+ then and there+ e9isting porta$le goods in his i%%ediate control+ such as a $ook or a Dewel+ does not o""er a pro%ise $ut an act+ and i" the other party takes the goods on the spot and $eco%es lia$le to pay "or the%+ he 3the $uyer8 is the Pro%isor( ,n such a case the seller would see% not to %ake a proposal within the ter%s o" the Contract 4ct( 4 *uotation o" prices is not an o""er+ $ut an in!itation "or o""erJ the sa%e is true o" %any co%%on "or%s o" ad!ertise%ent( 4 state%ent o" the lowest price at which a landowner is prepared to sell is not an o""er( 4 ter% in a partition deed that any o" the parties wishing to sell his share will sell to the others at the %arket !alue is not an o""er $ut an undertaking to %ake an o""er( #he 4ct does not say+ $ut it see%s to i%ply+ that e!ery pro%ise is an accepted proposal( ,n the Co%%on Law this is not so+ "or a $inding pro%ise %ay $e %ade $y deed+ that is+ $y writing under seal without any co%%unication $etween the parties at all( #his is $ecause the deed+ as an ancient "or%al %ethod o" proo"+ was conclusi!e against its %aker( /romisor and /romisee )as been de%ined in section !;c< #he person %aking the proposal is called Lt)e /romisorP and #he person accepting the proposal is called Lt)e /romiseeP #o trans"or% a pro%ise into an agree%ent consideration is also an i%portant ingredient( Consideration has $een de"ined in section @ 3d8 o" the 4ct which is reproduced $elow& Consideration <hen at the desire o" the Pro%isor+ the Pro%isee or any other person who has done or a$stained "ro% doing+ or does or a$stains "ro% doing+ or pro%ises to do or to a$stain "ro% doing+ so%ething+ such act or a$stinence or pro%ise is called a consideration "or the pro%ise( 132 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU 4ll agree%ents are not contracts+ %eaning there$y that all agree%ents are not en"orcea$le at law( :uch agree%ents are called !oid agree%ents( #he sa%e has $een de"ined in section @ 3g8 o" the 4ct which is reproduced $elow& 4egal relations)i( ,ntention to create legal relationship %ust e9ist+ in co%%ercial transactions it is presu%ed that such intention always e9ists( :ocial agree%ents do not gi!e rise to any legal relationship+ hence no rights or o$ligations arise.accrue "ro% social agree%ents+ i(e( 3:ocial agree%ents are not en"orcea$le at law8 "ree consent #his is an i%portant essential o" a !alid contract( ,t re*uires that contract should $e entered into with "ree consent o" parties( Consent is said to be %ree i% not caused b#: Coercion ndue in"luence /raud -isrepresentation or -istake Com(etent /arties 4nother i%portant essential o" a !alid contract is the legal capacity o" the parties to enter into a contractJ this has $een pro!ided in section o" the 4ct which is reproduced $elow& F)!ery person is co%petent to contract who is o" the age o" %aDority according to law to which he is su$Dect+ and who is o" sound %ind+ and is not dis*uali"ied "ro% contracting $y any law to which he is su$DectG( 2)o are com(etent to contractG )!ery person is co%petent to contract who is o" the age o" %aDority according to the law to which he is su$Dect+ and who is o" sound %ind+ and is not dis*uali"ied "ro% contracting $y any law to which he is su$Dect( #his section deals with personal capacity in three distinct $ranches& 3a8 dis*uali"ication $y in"ancyJ 3$8 dis*uali"ication $y insanityJ 3c8 other special dis*uali"ications $y personal law( JTo ContractCJ+++%eans+ to $ind hi%sel" $y pro%ise( 4 %inor who gi!es !alue+ without pro%ising any "urther per"or%ance+ to a person co%petent to contract is entitled to sue hi% "or the pro%ised e*ui!alent( #his %ay $e properly not in contract $ut on a *uasi-contract under section 60( MinorFs agreement: ," the "irst $ranch o" the rule laid down in the section $e con!erted into a negati!e proposition+ it reads thus& No person is co%petent to contract who is o" the age o" %aDority according to the law to which he is su$Dect& in other words+ a %inor is not co%petent to contract( #his proposition is capa$le o" two constructions ] either that a %inor is a$solutely inco%petent to contract+ in which case his agree%ent is !oid+ or that he is inco%petent to contract only in the sense that he is not lia$le on the contract though the other party is+ in which case there is a !oid a$le contract( ," the agree%ent is !oid+ the %inor can neither sue nor $e sued upon it+ and the contract is not capa$le o" rati"ication in any %annerJ i" it is !oid a$le+ he can sue upon it+ though he cannot $e sued $y the other party+ and the contract $e rati"ied $y the %inor on his attaining %aDority( <here+ an in"ant retains property o$tained under the contract "ro% the other party+ the e*uita$le re%edy o" restitution has $een applied+ e!en though the in"ant %ade no "alse representation as to his age( /a#ment o% debt incurred during minorit#: Copyright Virtual ni!ersity o" Pakistan 133
Banking Laws and Practices-BNK 601 VU <here a person on attaining %aDority pays o" de$t incurred $y hi% during %inority+ no *uestion o" rati"ication o" a contract arises+ since an agree%ent with a %inor is %erely !oid and not unlaw"ul+ the su% paid cannot $e sued "or su$se*uently+ and in law it %ust $e regarded on the sa%e "ooting as a gi"t( ,t is within the co%petence o" a certi"icated guardian appointed $y statute+ such as the >uardian and <ards 4ct+ 1C50+ or the !arious Courts o" <ards 4cts to enter into a contract "or the purchase or sale o" i%%o!a$le property on $ehal" o" the %inor with the sanction o" the Court( /ersons ot)er'ise Jdis:uali%ied %rom contractingCJ+++#he capacity o" a wo%an to contract is not a""ected $y her %arriage under the law( 4ccording to a$o!e de"inition the "ollowing para%eters would deter%ine t )e legal ca(acities o% (arties to a contract: ^ Parties to contract are required to be of the age of majority. ^ Of sound mind ^ )ot barred from entering into contracts by the o,eration of la#. 4a'%ul object Not eB(ressl# declared void+++ Some instances o% void agreement are given belo': Agreements in restraint o% marriage ;sec !.< )!ery agree%ent in restraint o" the %arriage o" any person+ other than %inor+ is !oid Agreements in restraint o% trade ;sec !5< )!ery agree%ent $y which any one is restrained "ro% e9ercising a law"ul pro"ession+ trade or $usiness o" any kind+ is to that e9tent !oid( Agreements in restraint o% legal (roceedings ;sec !6< Ever# agreement, b# ')ic) an# (art# t)ereto is restricted absolutel# %rom en%orcing )is rig)t under or in res(ect o% an# contract, b# t)e usual (roceedings in t)e ordinar# tribunals, or ')ic) limits t)e time 'it)in ')ic) )e ma# t)us en%orce )is rig)ts, is void to t)at eBtentC 4egal %ormalities #he agree%ents %ust "ul"ill all the re*uire%ents all the legal "or%alities such as& 3i8 <riting 3ii8 <itness 3iii8 4ttestation 3i!8 ;egistration Classi%ication o% contracts: Valid contract Valid contract is an agreement en%orceable b# la'C ?n suc) contract all essentials o% a contract as mentioned in section 8 are re:uired to be %ul%illedC ?n case breac) o% contract b# one (art#, t)e ot)er (art# )as a rig)t to %ile a suit %or t)is breac)C ?llustration: 4 contract "or the sale o" a car $etween -r( Iasir and -r( <a*as has $een concluded and all necessary "or%alities ha!e $een co%pleted( #he said contract %eets all essentials o" a !alid contract( ," either o" the two that is -r( Iasir or -r( <a*as "ails to per"or% his part o" contract+ the counter party can sue the other party "or the $reach o" contract( 134 Copyright Virtual ni!ersity o" Pakistan
VU
Voidable contract 4 !oida$le contract is the one which is en"orcea$le $y law at the option o" one or %ore o" the parties to the contract+ $ut not at the option o" the other or others( 4s long as the contract is not a!oided or cancelled $y the party who is entitled to do so+ the contract shall re%ain a !alid contract( :uch contracts are !oida$le at the option o" aggrie!ed party( Voidable contract has $een de"ined in section ! ;i< o" the Contract 4ct which is reproduced $elow& F4n agree%ent which is en"orcea$le $y law at the option o" one or %ore o" the parties thereto+ $ut not at the option o" the other or others+ is a !oida$le contractG ++A contract becomes voidable in t)e %ollo'ing situations: <here consent o" a contracting party is not "ree <here Pro%isor pre!ented "ro% per"or%ance o" the contract( --An agreement on account of misrepresentation shall be voidable at the option of the person who is misled by such misrepresentation. ++?n case a voidable contract is acted u(on b# a (art# as valid, t)at (art# cannot subse:uentl# den# t)e validit# t)ereo%C Void contract 4 !oid contract is the one which is not en"orcea$le $y law( ,t has $een pro!ided in section ;j< o" the Contract 4ct( LA contract ')ic) ceases to be en%orceable b# la' becomes void ')en it ceases to be en%orceableC L A voidable contract is a good contract as long as it is not avoided b# t)e (erson ')o )as t)e o(tion to avoid ')ereas a void contract is not a contract at all %rom t)e ver# beginning in t)e e#e o% la'C EBam(le: -r( 4sla% resident o" Lahore entered into an agree%ent with -r( Ka%al+ a rice dealer at >uDranwala "or the purchase o" 100 tons o" rice( 'istrict Coordination =""icer 3 'C=8 Lahore had i%posed restriction on entry o" rice in the territorial Durisdiction o" 'istrict Lahore well $e"ore the date o" the a$o!e agree%ent( #he said agree%ent is not en"orcea$le at law+ hence !oid( :ituations o" !oid contract mpossibility of performance. t has been discussed in section !" #egal contract may became void due to some illegality afterwards. $evocation of a voidable contract by the party at whose option% the contract is avoidable becomes void contract nen"orcea$le Contract :uch contracts are unen"orcea$le $e"ore a court o" law due to so%e technical de"ects such as nondeposit o" court "ee+ su$%ission o" unsigned docu%ents+ a$sence o" writing+ where!er writing re*uired+ a$sence o" registration+ where!er re*uired under law( =n re%o!al o" these discrepancies+ the contract $eco%es en"orcea$le( EB(ress contract 4n e9press pro%ise shall lead to an e9press contract( :uch a contract %ay $e e9pressed $y words spoken or written( )9press contracts are contained in the pro!isions o" section 5 o" the 4ct( Copyright Virtual ni!ersity o" Pakistan 135
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?m(lied contract: :uch contracts are in"erred "ro% the acts and conduct o" the contracting parties( EBam(le: -r( 4sla% was engaged $y a $usiness %an as a helper at his shop( 1e has $een per"or%ing the Do$ assigned to hi%+ howe!er no appoint%ent letter was issued $y the shopkeeper( 4lthough there is no e9press agree%ent as to the e%ploy%ent o" -r( 4sla% $ut the acts and the conducts o" the respecti!e parties shall lead to a conclusion regarding the nature o" contract $etween the%( :ince the conclusions shall $e in"erred "ro% the acts and conduct o" the respecti!e parties+ such contract would $e called an i%plied contract( --#he pro!isions regarding e9press and i%plied contract as contained in section 5 are gi!en $elow& L?n so %ar as t)e (ro(osal or acce(tance o% an# (romise is made in 'ords, t)e (romises is said to be eB(ressC ?n so %ar as suc) (ro(osal or acce(tance is made ot)er'ise t)an in 'ords, t)e (romise is said to be im(liedC L 2e s)all continue 'it) %urt)er discussion on t)is to(ic
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<e already know that $esides other "ollowing are i%portant legal relationships $etween $anker and custo%er( 'e$tor and Creditor Creditor and 'e$tor Principal and 4gent Bailor and Bailee -ortgagor and -ortgagee Pledger and Pledgee #he a$o!e relationships are e9plained in the "ollowing paragraphs( 7ebtor and Creditor Relations)i( <hen custo%er deposits %oney in a $ank the relationship o" debtor and creditor is esta$lished+ in this caseJ &an$er is 7ebtor E Customer is Creditor 4 $ank per"or%s a nu%$er o" "unctions "or the custo%er( 4"ter the account in the $ank is opened and the relationship o" a $anker and custo%er is esta$lished+ the $ank not only undertakes to collect the che*ues which are deposited in the account $ut also %akes the pay%ent on $ehal" o" the custo%er+ whene!er there is a %andate "ro% the custo%er( #he che*ues which are reali2ed $y the $ank are deposited in this account o" the custo%er and on %any occasions+ the $ank per"or%s certain other "unctions on $ehal" o" the custo%er such as keeping the !alua$les+ etc(+ deposited $y the custo%er with the $ank as a trustee( =n %any occasions+ when the custo%er gi!es $ills "or collection to his $ank and the said $ank passes the $ills "or collection to another $ank and the a%ount o" the $ills is reduced as a result o" de$iting the custo%erHs account with collection charges as a result o" an agree%ent $etween two $anks+ the $ank is always acting on $ehal" o" the custo%er( #here are thus too %any occasions relating to so %any %atters which arise during the %utual dealings $etween the $anker and the custo%er and at each ti%e+ a *uestion arises as to what is the relationship $etween a $anker and a custo%er( ,t has now $een well settled that the "irst and "ore%ost relationship $etween the custo%er and the $ank is the relationship o" a Creditor and debtor. 1(P( :heldon in his Practice and .a# of Banking sets out this relationship as "ollows& M#he $anker when he recei!es %oney "ro% a custo%er does not hold the %oney in a "iduciary capacity( #o say that %oney is 'epositedHH with a $anker is likely to cause %isapprehension( <hat really happens is that the %oney is not deposited with+ $ut lent to the $anker+ and all that the $anker engages to do is to discharge the de$t $y paying o!er an e*ual a%ount when called upon( 1als$uryHs La2us o" )ngland+ 3:i%onds )dn(8 Vol( @+ p( 166+ states that receipt o" %oney $y a $anker "ro% or on account o" his custo%er constitutes hi% the de$tor o" the custo%er( 4%erican Aurisprudence discussing the relation $etween $ank and general depositor has the "ollowing to say& SecC 111C M,t is a "unda%ental rule o" $anking law that in the case o" a general deposit o" %oney in a $ank+ the %o%ent the %oney is deposited it $eco%es the property o" a $ank+ and the $ank and the depositor assu%e the legal relation o" de$tor and creditor( #he legal e""ect o" the transaction is that o" a loan to the $ank upon the pro%ise and o$ligation+ usually i%plied $y law+ to pay or repay the a%ount deposited usually upon de%andJ there is nothing o" a trust or "iduciary nature o" a $ail%ent in the transaction or relationship or in the nature o" any right to speci"ic %oney deposited\(G Corpus Auris gi!es the "ollowing in"or%ation&
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Banking Laws and Practices-BNK 601 VU SecC *!.( M#he contract $etween a $ank and a depositor is not %aterially di""erent "ro% any other contract $y which one person $eco%es $ound to take charge o" and repay anotherHs+ "unds+ and there is no trust relation $etween a $ank and a general depositor( #he relation $etween a $ank and a depositor %ay $e dual in character+ the $ank $eing the depositorHs de$tor with respect to one thing and his agent with respect to another+ or his de$tor at one ti%e and his agent at anotherJ and while the relation $etween the $ank and a depositor in respect to a general deposit is generally regarded as that o" a de$tor and creditor+ yet in another sense the depositor is the owner o" the deposit+ in that he can de%and repay%ent at any ti%e( ,t is co%petent "or a $ank o" deposit to enter into a collateral agree%ent with the depositor with re"erence to the disposition o" the proceeds o" deposits((((M 4ccording to A / S)eldon in his pu$lication Kpractice and law o" $ankingE+ this relationship has $een e9pressed as under& F#he $anker when he recei!es %oney "ro% a custo%er does not hold the %oney in the "iduciary capacity( #o say that the %oney is deposited with a $anker is likely to cause %isapprehension( <hat really happens is that the %oney is not deposited with+ $ut lent to the $anker+ and all that the $anker engages to do is to discharge the de$t $y paying o!er an e*ual a%ount when called uponG Creditor and 7ebtor Relations)i(: <hen a $ank grants loan or other credit "acilities to the custo%er+ relationship is re!ersed+ that is now Customer is 7ebtor E Banker is CreditorC ,n such cases it is not the %oney o" the custo%er in the hands o" the $anker $ut it is the %oney o" the $ank in the hands o" the custo%er $ut in all such cases when a custo%erHs account is o!er drawn+ the custo%er does not cease to $e a custo%er( /rinci(al E Agent Relation ,n certain situations+ the $anker ser!es as agent o" the custo%er 3principal8 so%e o" these situations are enu%erated $elow& Collection o" che*ues on $ehal" o" the custo%er Collection o" di!idends and $ills o" e9change 4cting as attorney+ e9ecutor or representati!e o" a custo%er Buying and selling securities on his $ehal"( 4ccording to !keleton another ser!ice $eing rendered $y a $anker to his custo%er is to collect his custo%erHs che*ue and other credit instru%ents( ,n these transactions+ the relationship $etween the two parties is that o" principal and agentNthe $anker acting as his custo%erHs agent( #his is $ecause in the course o" $usiness incidental to $anking+ a $anker undertakes to per"or% %any ser!ices "or the custo%er such as& Buying and selling securities on his $ehal"J collection o" che*ues+ di!idends+ $ills or pro%issory notes on his $ehal"J acting as a trustee+ attorney+ e9ecutor+ correspondent or a representati!e o" a custo%er( ,n the per"or%ance o" all these "unctions+ the $anker acts as an agent o" the custo%er( ,n general ter%s+ 4gency re"ers to the relationship which e9ists $etween two persons+ the /rinci(al and the Agent in which the 4gent has to per"or% di""erent duties. "unctions as per instructions o" the (rinci(al and also enters into contract with the third party . parties on $ehal" o" the principal( #he relationship o" agency plays an i%portant role in $usiness and co%%ercial dealings( #his relationship is legal created $y !irtue o" agree%ent $etween /rinci(al and Agent 7e%inition o% Agent and /rinci(al: Sec 6! Agent is a person e%ployed to do any act "or another or to represent another in dealing with a third persons( #he person "or who% such act is done+ or who is so represented+ is called the /rinci(alC EB(lanation #he legal relation $etween a %erchant in one country and a co%%ission agent in other is that o" principal and agent+ and not seller and $uyer+ though this is consistent with the agent and principal+ 138 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU when the agent consigns the goods to the principal+ $eing in a relation like that o" seller and $uyer "or so%e purposes( 4 %erchant+ there"ore+ in this country who orders goods through a "ir% o" co%%ission agents in )urope cannot hold the "ir% lia$le as i" they were !endors "or "ailure to deli!er the goods( 4nd the result is the sa%e i" the goods are ordered through a $ranch in this country o" a "ir% o" co%%ission agents in another country( /or the sa%e reason+ where a co%%ission agent $uys goods "or a %erchant at a price s%aller than the li%it speci"ied in the indent+ he cannot charge any price higher than that actually paid $y hi%+ e9cept in the case o" a custo% to the contrary( 4n agent %ay ha!e+ and o"ten has+ in "act+ a large discretion+ $ut he is $ound in law to "ollow the principalHs instructions pro!ided they do not in!ol!e anything law"ul( #o this e9tent an agent %ay $e considered itHs a superior kind o" ser!antJ and a ser!ant who is entrusted with any dealing with third persons on his %asterHs $ehal" is to that e9tent an agent( But a ser!ant %ay $e wholly without authority to do anything as an agent+ and agency+ in the case o" partners+ e!en an e9tensi!e agency+ %ay e9ist without any contract o" hiring and ser!ice( Agenc# ma# be created in t)e %ollo'ing 'a#s: By consent By operation o" law By estoppel By rati"ication Agenc# b# Consent: Consent %ay $e e9press or i%plied( EB(ress Agenc#: :uch agency is created $y words either spoken or written( ,n $usiness transactions+ this relationship is usually esta$lished through writing an agree%ent ?m(lied Agenc#: 4n authority is re"erred to as i%plied when it is in"erred "ro% the conduct o" the parties or circu%stances o" the case( 7e%initions o% eB(ress and im(lied aut)orit# as contained in section 65 o% t)e Act is given belo': 4n authority is said to $e e9press when it is gi!en $y words spoken or written( 4n authority is said to $e i%plied when it is to $e in"erred "ro% the circu%stances o" the caseJ and things spoken or written+ or the ordinary course o" dealing+ %ay $e accounted "or circu%stances o" the case( T#(es o% Agent: #he agents %ay $e classi"ied as under& /ublic Agents- these are representati!es o" a :tate /rivate AgentsNthese agents represent indi!iduals or co%panies General Agents- these agents pertaining to a $usiness+ !ocation or pro"ession S(ecial AgentsNsuch agents are appointed "or a speci"ic transaction( Co+Agents-- :uch 4gents act along with Principal( 7uties o% t)e Agent: 'uties o" agent are contained in sec @11 to @1C o" the Contract 4ct( :o%e o" the i%portant duties are gi!en $elow& #o "ollow principalEs instructions #o show re*uired skill and diligence 4gent to render proper accounts Copyright Virtual ni!ersity o" Pakistan 139
Banking Laws and Practices-BNK 601 4gent to pass on any $ene"its deri!ed $y hi% Agent3s dut# in conducting (rinci(al3s businessC ;sec ! <
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4n agent is $ound to conduct the $usiness o" his principal according to the directions gi!en $y the principal+ or+ in the a$sence o" any such directions+ according to the custo% which pre!ails in doing $usiness o" the sa%e kind at the place where the agent conducts such $usiness( <hen the agent acts otherwise+ i" any loss $e sustained+ he %ust %ake it good to his principal+ and+ i" any pro"it accrues+ he %ust account "or it( ?llustrations 3a8 4+ an agent engaged in carrying on "or B+ a $usiness+ in which it is the custo% to in!est "ro% ti%e to ti%e+ at interest+ the %oneys which %ay $e in hand+ o%its to %ake such in!est%ents( 4 %ust %ake good to B the interest usually o$tained $y such in!est%ents( 3$8 B+ a $roker+ in whose $usiness it is not the custo% to sell on credit+ sells goods o" 4+ on credit to C+ whose credit at the ti%e was !ery high( C $e"ore pay%ent $eco%es insol!ent( B %ust %ake good the loss to 4( 3c8 4n agent+ instructed to warehouse goods at a particular place+ warehouse a portion o" the% at another place+ where they are destroyed+ without negligence( 1e is lia$le to the principal "or the !alue o" the goods destroyed( 3d8 4n agent+ instructed to insure goods+ neglects to do so( 1e is lia$le to the principal "or their !alue in the e!ent o" their $eing lost( 3e8 4 $roker+ entrusted with goods "or sale+ sells the% $y auction at an inade*uate price+ not ha!ing %ade an esti%ate o" the !alue in accordance with the custo% o" the particular trade( 1e %ust %ake good the loss( 3"8 4n auctioneer+ contrary to the usual custo%+ takes a $ill o" e9change in pay%ent o" the price o" goods sold( 1e is lia$le to the principal "or the a%ount o" the $ill in the e!ent o" its $eing dishonored( 3g8 4n agent+ $ound $y his contract to keep proper $ooks o" account+ o%its to scrutini2e+ e9a%ine or check the accounts o" his su$ordinates who% he i%plicity trusts( #aking ad!antage o" this+ the su$ordinates co%%it gross "rauds on hi% and his e%ployers( #he "rauds and de"alcations $eing due to the agentEs "ailure to per"or% his duty he is lia$le to %ake good the loss there$y caused( S$ill and diligence re:uired %rom agent ;sec ! !< 4n agent is $ound to conduct the $usiness o" the agency with as %uch skill as is generally possessed $y persons engaged in si%ilar $usiness+ unless the principal has notice o" his want o" skill( #he agent is always $ound to act with reasona$le diligence+ and to use such skill as he possessesJ and to %ake co%pensation to his principal in respect o" the direct conse*uence o" his own neglect+ want o" skill or %isconduct+ $ut not in respect o" loss or da%age which are indirectly or re%otely caused $y such neglect+ want o" skill or %isconduct( ?llustrations 3a8 4+ a %erchant in ,sla%a$ad+ has an agent+ B+ in London to who% a su% o" %oney is paid on 4Hs account+ with orders to re%it( B retains the %oney "or a considera$le ti%e( 4+ in conse*uence o" not recei!ing the %oney+ $eco%es insol!ent( B is lia$le "or the %oney and interest "ro% the day on which it ought to ha!e $een paid+ according to the usual rate+ and "or any "urther direct loss---as e(g(+ $y !ariation o" rate o" e9change--$ut not "urther( 3$8 4+ an agent "or the sale o" goods+ ha!ing authority to sell on credit+ sells to B on credit+ without %aking the proper and usual in*uiries as to the sol!ency o" B( B+ at the ti%e o" such sale+ is insol!ent( 4 %ust %ake co%pensation to his principal in respect o" any loss there$y sustained( 3c8 4+ an insurance $roker+ e%ployed $y B to e""ect an insurance on a ship+ o%its to see that the usual clauses are inserted in the policy( #he ship is a"terwards lost( ,n conse*uence o" the o%ission o" the clauses nothing can $e reco!ered "ro% the underwriters( 4 is $ound to %ake good the loss to B(8 4+ a %erchant in )ngland+ directs B+ his agent at Karachi who accepts the agency+ to send hi% 100 $ales o" cotton $y a certain ship( B+ ha!ing it in his power to send the cotton+ o%its to do so( #he ship arri!es sa"ely in )ngland( :oon a"ter her arri!al+ the price o" cotton rises( B is $ound to %ake good to 4+ the pro"it which he %ight ha!e %ade $y the 100 $ales o" cotton at the ti%e the ship arri!ed+ $ut not any pro"it he %ight ha!e %ade $y the su$se*uent rise( 140 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 AgentFs accounts ;section ! *< 4n agent is $ound to render proper accounts to his principal on de%and(
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AgentFs dut# to communicate 'it) (rinci(al ;section ! 1< ,t is the duty o" an agent+ in cases o" di""iculty+ to use all reasona$le diligence in co%%unicating with his principal+ and in seeking to o$tain his instructions( 4gent is under a duty to consult principal in a Mdi""icultM situation so as to sa!e repudiation o" his action $y principal( Rig)t o% (rinci(al ')en agent deals, on )is o'n account, in business o% agenc# 'it)out (rinci(alFs consentC; sec ! 0< ," an agent deals on his own account in the $usiness o" the agency+ without "irst o$taining the consent o" his principal and ac*uainting hi% with all %aterial circu%stances which ha!e co%e to his own knowledge on the su$Dect+ the principal %ay repudiate the transaction+ i" the case shows either that any %aterial "act has $een dishonestly concealed "ro% hi% $y the agent+ or that the dealings o" the agent ha!e $een disad!antageous to hi%( /rinci(alFs rig)t to bene%it gained b# agent dealing on )is o'n account in business o% agenc# ;sec ! .< ," an agent+ without the knowledge o" his principal+ deals in the $usiness o" the agency on his own account instead o" on account o" his principal+ the principal is entitled to clai% "ro% the agent any $ene"it which %ay ha!e resulted to hi% "ro% the transaction( AgentFs rig)t o% retaining out o% sums received on (rinci(alFs accountC; sec ! 5< 4n agent %ay retain+ out o" any su%s recei!ed on account o" the principal in the $usiness o" the agency+ all %oneys due to hi%sel" in respect o" ad!ances %ade or e9penses properly incurred $y hi% in conducting such $usiness+ and also such re%uneration as %ay $e paya$le to hi% "or acting as agent( AgentFs dut# to (a# sums received %or (rinci(al ;sec ! 6< :u$Dect to such deductions+ the agent is $ound to pay to his principal all su%s recei!ed on his account( Rig)ts o% t)e Agent: #hese are discussed in the "ollowing paragraphs& 2)en agent3s remuneration becomes due+Sec ! -& ,n the a$sence o" any special contract+ pay%ent "or the per"or%ance o" any act is not due to the agent until the co%pletion o" such actJ $ut an agent %ay detain %oneys recei!ed $y hi% on account o" goods sold+ although the whole o" the goods consigned to hi% "or sale %ay not ha!e $een sold+ or although the sale %ay not $e actually co%plete( Agent to be indemni%ied against conse:uences o% la'%ul acts ;sec !!!< #he e%ployer o" an agent is $ound to inde%ni"y hi% against the conse*uences o" all law"ul acts done $y such agent in e9ercise o" the authority con"erred upon hi%( Agent to be indemni%ied against conse:uences o% acts done in good %ait) ;sec !!*< <here one person e%ployees another to do an act and the agent does the act in good "aith+ the e%ployer is lia$le to inde%ni"y the agent against the conse*uences o" that act+ though it cause an inDury to the rights o" third persons( Com(ensation to agent %or injur# caused b# (rinci(alFs neglect ;sec !!0< The principal %ust %ake co%pensation to his agent in respect o" inDury caused to such agent $y the principalHs neglect or want o" skill( En%orcement and conse:uences o% agentFs contracts ;sec !!.< Copyright Virtual ni!ersity o" Pakistan 141
Banking Laws and Practices-BNK 601 VU Contracts entered into through an agent+ and o$ligations arising "ro% acts done $y an agent+ %ay $e en"orced in the sa%e %anner+ and will ha!e the sa%e legal conse*uences as i" the contracts had $een entered into and the acts done $y the principal in person( /rinci(al3s liabilit# 'it) regard to agreements caused b# misre(resentation or %raud b# agent: Sec !*6 -isrepresentation %ade+ or "rauds co%%itted+ $y agents acting in the course o" their $usiness "or their principals+ ha!e the sa%e e""ect on agree%ents %ade $y such agents as i" such %isrepresentations or "rauds had $een %ade or co%%itted $y the principalsJ $ut %isrepresentations %ade+ or "rauds co%%itted+ $y agents+ in %atters which do not "all within their authority+ do not a""ect their principals( Sco(e o% duties o% /rinci(al: 'uties o" the principal are enu%erated $elow& Pay%ent o" re%uneration to the agent Not to pre!ent his agent "ro% per"or%ing the duties. acts assigned to hi% under the contract and "or which re%uneration is paya$le( 4ny legiti%ate e9penses which ha!e $een incurred $y the agent in the course o" per"or%ance o" his duties are to $e inde%ni"ied $y the principal(
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<e ha!e already discussed the under noted legal relationships $etween $anker and custo%er( o 'e$tor and Creditor+ o Creditor and 'e$tor o Principal and 4gent No' 'e s)all cover t)e %ollo'ing relations)i(s: o Bailor and Bailee o -ortgagor and -ortgagee o Pledger and Pledgee &ailor and &ailee Relations)i(: ,n $anker custo%er relationship+ $ail%ent is also i%portant types o" relations( ,t %ay arise in the "ollowing situations& 4!ailing sa"e custody ser!ices 3lockers8 Pledge o" stocks as security "or a!ailing credit "ro% $ank( ,n these cases--Customer--- &ailor 0 &an$---- &ailee &ailment #he de"inition o" $ail%ent as contained in section 17C is gi!en here under& 4 F$ail%entG is the deli!ery o" goods $y one person to another "or so%e purpose+ upon a contract that they shall+ when the purpose is acco%plished+ $e returned or otherwise disposed o" according to the directions o" the person deli!ering the%( #he person deli!ering the goods is called the F$ailorG( #he person to who% they are deli!ered is called the F$aileeG EB(lanationC+++," a person already in possession o" the goods o" another contracts to hold the% as a $ailee+ he there$y $eco%es the $ailee+ and the owner $eco%es the $ailor+ o" such goods although they %ay not ha!e $een deli!ered $y way o" $ail%ent( Essentials o% &ailment: Contract--there is an underlying contract $etween the $ailor and $ailee+ there %ay $e an e9plicit contract or it %ay $e an i%plied contract( S(eci%ic (ur(ose++the $ail%ent o" goods is always "or so%e speci"ic purpose( 7eliver# o% goods--there %ust $e deli!ery o" %o!a$le goods in a contract o" $ail%ent( No c)ange o% o'ners)i(--in a contract o" $ail%ent+ only the possession o" goods is trans"erred "ro% $ailor to the $ailee+ whereas the $ailor has all ownership rights o!er the goods deli!ered( ;eturn o" the goods deli!ered on acco%plish%ent o" purpose-- ')en t)e (ur(ose %or ')ic) t)e goods are delivered is com(leted, t)e goods must be returned in t)e original %orm or modi%ied %orm as (er instructions o% t)e bailorC "or t)e bene%it o% t)e bailor+- -r( Iasir+ while going out o" city handed o!er so%e precious household articles to -r( s%an "or sa"e custody+ without any o$ligation to pay any "ee. charges( ,t is a $ail%ent "or the $ene"it o" the $ailor( "or t)e bene%it o% t)e baileeD-r( %er handed o!er his car to -r( 4hsan+ as he was in need o" con!eyance "or "ew days( -r( %er handed o!er this car without any o$ligation on the part o" -r( 4hsan to pay any rent. charges "or the use o" this car( #his $ail%ent is e9clusi!ely "or the $ene"it o" the -r( 4hsan+ the $ailee( Copyright Virtual ni!ersity o" Pakistan 143
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/or the $ene"it o" $ailor and $aileeN MrC A)mad availed loc$er %acilities %rom M9S K=I ban$ ltdC Under t)e terms and conditions o% t)e contract MrC A)mad 'as re:uired to (a# RsC 8889 annual %ee on account o% availing t)is %acilit#C T)is contract is %or t)e bene%it o% bot) (arties, t)e bailor and t)e baileeC EB(lanation: :cope o" $ail%ent and its essentials are e9plained in detail in the "ollowing paragraphs( Nature o% t)e transactionC+++MBail%entM is a technical ter% o" the Co%%on Law( ,t in!ol!es change o" possession( =ne who has custody without possession+ like a ser!ant+ or a guest using his hostHs goods+ is not a $ailee( #he constructi!e deli!ery will create the relation o" $ailor and $ailee as well as actual deli!ery( #he $aileeHs duty to deal with the goods according to the $ailorHs orders is incidental to the contract o" $ail%ent+ and arises on the deli!ery o" the goods+ although those orders %ay ha!e already $een gi!en and accepted in such a %anner as to constitute a prior special contract( 4s a %atter o" pleading this is no longer %aterial in this country+ $ut it %ight still $e %aterial with regard to the period o" li%itation( 4il%ent is necessarily dealt with $y the Contract 4ct only so "ar as it is a kind o" contract( ,t is not to $e assu%ed that without an en"orcea$le contract there cannot in any case $e a $ail%ent( #he words( M=therwise disposed o"M in the present section e9press the co%%on law as now understood( M,t see%s clear that a $ailee is not the less a $ailee $ecause he is clothed with authority to sell the thing which is $ailed to hi%+M e(g(+ a "actor "or sale( =n the whole a $ail%ent %ay $e descri$ed as a deli!ery on condition+ to which the law usually attaches an o$ligation to redeli!er the goods+ or otherwise deal with the% as directed+ when the condition is satis"iedJ $ut there %ay $e+ in particular cases+ a $ail%ent without an en"orcea$le o$ligation Rig)ts and duties o% bailee To ta$e care o% goods delivered b# bailorDthis aspects are contained in the "ollowing sections& ++Sec 0 & in all cases o" $ail%ent the $ailee is $ound to take as %uch care o" the goods $ailed to hi% as a %an o" ordinary prudence would+ under si%ilar circu%stances+ take o" his own goods o" the sa%e $ulk+ *uality and !alue as the goods $ailed( ++ Sec 0!& the $ailee+ in the a$sence o" any special contract+ is not responsi$le "or the loss+ destruction or deterioration o" the thing $ailed+ i" he has taken the a%ount o" care o" it descri$ed in section 1B1( E%%ects o% miBture, 'it)out bailor3s consent ')en t)e goods can be se(arated +Sec 0.& i" the $ailee+ without the consent o" the $ailor+ %i9es the goods o" the $ailor with his own goods+ and the goods can $e separated or di!ided+ the property in the goods re%ains in the parties respecti!elyJ $ut the $ailee is $ound to $ear the e9pense o" separation or di!ision+ and any da%age arising "ro% the %i9ture( E%%ect o% miBture, 'it)out bailor3s consent, ')en t)e goods cannot be se(arated ++Sec 05& i" the $ailee+ without the consent o" the $ailor+ %i9es the goods o" the $ailor with his own goods+ in such a %anner that it is i%possi$le to separate the goods $ailed "ro% the other goods and deli!er the% $ack+ the $ailor is entitled to $e co%pensated $y the $ailee "or the loss o" the goods( 4ccording to section 1B7+ $ailee shall not %ake un-authori2ed use o" the goods deli!ered to hi%( 4ccording to section 160+ $ailee is re*uired to return the goods deli!ered to hi% "or so% purpose( 4ccording to section 16?+ $ailee is re*uired to return an increase or pro"it in lieu o" goods deli!ered( EB(lanation: T)e duties o% t)e bailee are eB(lained in greater detail in t)e %ollo'ing (aragra()s: 144 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU #he $ailee has no right to dispose o" or sell the property unless speci"ically authorised to do so( 1e has only a right to retain the goods $ailed with hi% until he recei!es due re%uneration "or the ser!ice rendered in respect o" the goods( 1e is responsi$le "or the sa"e deli!ery o" the goods $ailed with hi% and in de"ault is responsi$le to the $ailor "or any loss o" goods Goods given to a (erson b# ban$ on trust recei(t+++/erson becomes a bailee+++4iable %or criminal breac) o% trust in case o% non+accounting o% goodsC #he e9ecution o" a trust receipt is a recognised %ode o" %aking a person $ailee o" the goods and in such circu%stances the Bank %ust $e dee%ed to $e in possession or control o" the goods( #he !alidity and e""icacy o" such instru%ents o" trust are now generally acknowledged( ," a person who has signed such a trust receipt+ "ails to hand o!er to the Bank the sale-proceeds o" the goods sold+ the "or%er would $e lia$le "or cri%inal http&..www(paksearch(co%.>o!ern%ent.C=;P=;4#).Contract.P7?(ht% $reach o" trust ?ntentional 'rong deliver# b# carrier+++Carrier liable %or damages +++ <here the carrier has %ade intentional wrong"ul deli!ery o" goods+ he cannot escape lia$ility to inde%ni"y the plainti"" "or the loss caused to hi% $y wrong"ul deli!eries o" the http&..www(paksearch(co%.>o!ern%ent.C=;P=;4#).Contract.P77(ht% consign%ents Care to be ta$en b# bailee ;sec 0 < ,n all cases o" $ail%ent the $ailee is $ound to take as %uch care o" the goods $ailed to hi% as a %an o" ordinary prudence would+ under si%ilar circu%stances+ take o" his own goods o" the sa%e $ulk+ *uality and !alue as the goods $ailed Contract b# bailee eBem(ting )imsel% %rom liabilit# %or negligenceC+++ #he learned authors considered that a contract $y a $ailee purporting to e9e%pt hi%sel" wholly "ro% lia$ility "or negligence was not !alid( #his opinion is $ased on the e9press pro!isions "or contracting out in :( 1B@+ and in "act throughout the Chapter on Bail%ents where!er a rule o" law is to operate only in the a$sence o" a contract to the contrary+ it is e9pressly so stated in sections 16?+ 16B+ 160+ 161+ and 167( #)e%t o% goods (ledged 'it) &an$---'ocu%ent o" pledge containing condition that during the continuance o" pledge agree%ent the $orrowers shall $e responsi$le "or all loss+ da%age+ or deterioration o" security caused $y the"t+ "ire+ rain or any other cause whatsoe!er---#here $eing( no discrepancy $etween pro!isions o" :( 1B1+ Contract 4ct+ 1C6@ and condition o" docu%ent o" pledge+ i" loss had $een caused $y the"t+ "ire+ rain or any other cause+ it would $e the duty o" the $ailee to e9plain that he had taken care o" the goods as a %an o" ordinary prudence would under si%ilar circu%stances take o" his own goods and i" in spite o" that the goods pledged were lost in %anner as recorded in the condition o" docu%ent o" pledge+ lia$ility o" $orrower could not $e http&..www(paksearch(co%.>o!ern%ent.C=;P=;4#).Contract.PBC(ht% legally denied( 4oss to goods b# negligence o% s)i(+o'ner+++Claim %or damages against s)i(+o'ner sustainable: #he ship-owner co%%itted a $reach o" the o$ligation contained in the $ill o" lading and as such the consignee was entitled tohttp&..www(paksearch(co%.>o!ern%ent.C=;P=;4#).Contract.P61(ht% reco!er da%ages( 7amage to contents o% (arcel+++&urden o% (roo% is on consignor++Mere damage to containers does not (rove damage to contentsC #he $urden o" proo" was on the plainti"" to show that the da%age to the contents was caused $y the negligence o" the ser!ants o" the Carrier while the Crates were in its custody( No such e!idence has $een produced $y the plainti"" and %erely+ $ecause so%e o" the wooden crates were e9ternally $roken and so%e card-$oard cases torn+ as stated in the :ur!ey ;eport+ it cannot $e in"erred+ nor is there any e!idence to show+ that the e9ternal da%age %ust ha!e resulted in 'a%age to the contents 4oss o% goods in (ossession o% bailee+++Onus o% (roo% as to negligence o% bailee: <here goods are lost or destroyed while in (possession o" $ailee the onus o" placing all the %aterials in his possession or knowledge is on the $ailee+ while the onus o" esta$lishing negligence is on the plainti"" Copyright Virtual ni!ersity o" Pakistan 145
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Carriage o% goods b# sea %rom %oreign (ort to /a$istan+++7amage to goods+++Contract Act a((liesC+++#he pro!isions o" the rules to the Carriage o" >oods $y :ea 4ct+ 15@B do not apply in relation to carriage o" goods $y sea in a ship carrying goods "ro% a "oreign port to a port in Pakistan+ as is the present case( #here"ore+ the rights and lia$ilities o" the parties ha!e to $e ascertained $y re"erence to the proper law o" the contract which in this case+ is the Pakistan law &u#er rejecting goods+++?% can sell t)em to recover 'are+)ouse c)arges %or storing t)emC+++ #he $uyer reDected the goods and then disposed the% o" in order to reco!er the ware-house charges "or ha!ing stored the%( 1e contended that he as a $ailee had the right to do so Aeld: #he $uyer o" the goods ha!ing reDected the% and therea"ter selling the% as the goods $elonging to hi%+ stands on a di""erent "ooting than the $ailee conte%plated under sections 1B1 and 160 o" the Contract 4ct( #he principle on which a $ailee is entitled to dispose o" the goods or has lien on the goods $ailed with hi% are entirely di""erent and are not applica$le to the case o" the sale o" goods( 4s discussed a$o!e+ the $uyer o" the goods a"ter reDecting the%+ has no lien on the goods in dispute and %ust place the% at the disposal o" the seller "or dealing with the% in any %anner which he likes 4oss o% goods during transit+++Rail'a# liable+++Absence o% bra$e+++Negligence o% rail'a#C+++ <here goods were lost during transit and it was "ound that there was no !acuu% or $rake in the !an o" the guard so that the train could not $e stopped in case o" the"t in the running train( Aeld: #here ought to $e a !acuu% in a train in order that in case o" the"t while it is running it %ay $e stopped( #hat a !acuu% should $e there in the $rake o" the guard is not denied and the "ailure to keep a !acuu% against the rules would $e negligence( #here"ore the "ailure to pro!ide $rake should $e considered a negligent act on the part o" the ;ailway( Aeld %urt)er: #hat there is no satis"actory e!idence "ro% which it could $e in"erred that they had taken proper care o" the consign%ent as $ailer o" the goods consigned( #here"ore+ the railway was lia$le "or the loss o" goods( Mortgagor and Mortgagee Relations)i( <hen credit "acility is pro!ided $y the $ank to a custo%er against the security 3collateral8 o" i%%o!a$le property+ the relationship o" -ortgagor and -ortgagee is esta$lished( ,n this situation& MortgagorN Customer MortgageeN &an$ Mortgage 7e%ined: sec 06: 3a8 4 %ortgage is the trans"er o" an interest in speci"ic i%%o!ea$le property "or the purpose o" securing the pay%ent o" %oney ad!anced or to $e ad!anced $y way o" loan+ an e9isting or "uture de$t+ or the per"or%ance o" an engage%ent which %ay gi!e rise to a pecuniary lia$ility( Mortgagor: #he trans"eror is called a %ortgagor Mortgagee: #he trans"eree a %ortgagee Mortgage Mone#: #he principal %oney and interest o" which pay%ent is secured "or the ti%e $eing are called the %ortgage-%oney Mortgage 7eed: the instru%ent 3i" any8 $y which the trans"er is e""ected is called a %ortgage deed( Nature o% Transaction: ,n -ortgage+ the rights and interests which are !ested in -ortgagor are trans"erred $y hi% in "a!or o" the other person+ the -ortgagee( -ortgage in "act is a trans"er o" an interest in speci"ic i%%o!a$le property as security "or the repay%ent o" a de$t and such an interest is itsel" i%%o!a$le property( #he nature o" the right that is trans"erred would depend upon the "or% o" -ortgage( 146 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 T#(es o% Mortgages: ;egistered -ortgage )*uita$le -ortgage Registered or 4egal Mortgage #his is created through a "or%al docu%ent called %ortgage deed( -ortgage deed is registered with the ;egistrar o" titles( ,t is co%parati!ely e9pensi!e as it in!ol!es sta%p duty and registration "ee( E:uitable Mortgage: #his is created $y deposit o" title deed $y the %ortgagor( -e%orandu% regarding deposit o" title deed is also signed $y respecti!e parties( Clear title o" the %ortgagor %ust $e ascertained $y the %ortgagee( Rig)ts o% Mortgagee #o sell the %ortgaged property in case o" de"ault $y %ortgagor ;ight to "ore-closure ;ight to "ile suit
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/ledger and /ledgee Relations)i( <hen credit "acility is pro!ided $y a $ank to its custo%ers against security 3Collateral o" %o!a$le property8 the ;elationship o" Pledger and Pledgee is esta$lished( ,n this case& /ledgerNCusto%er /ledgeeNBank /ledge ,t has $een de"ined in section 16@ o" the Contract 4ct which is gi!en $elow& J/ledge,J J(a'nor,J and J(a'neeJ de%inedC #he $ail%ent o" goods as security "or pay%ent o" a de$t or per"or%ance o" a pro%ise is called MpledgeM( #he $ailor is in this case called the Mpawnor(M #he $ailee is called the Mpawnee(M #he pledge has actual control o" pledge stocks.goods( Pledge can sell pledged stocks $y gi!ing reasona$le notice to the $orrower( Be"ore disposal pledge should pu$lish the notice through news papers etc( Comments #he $ailee tendering a contract o" pledge does not $eco%e owner+ $ut+ as ha!ing possession and right to possess+ he is said to ha!e a special property( 4ny kind o" goods+ docu%ents+ or !alua$le things o" a personal nature %ay $e pledged( 'eli!ery is necessary to co%plete a pledgeJ it %ay $e actual or constructi!e( ,t is su""icient i" the thing pledged is deli!ered under the contract within a reasona$le ti%e o" the lenderHs ad!ance $eing %ade( Pledge----onthly state%ents o" stocks lying in godown showing goods as pledged with de"endant-Bank---4ll such docu%ents signed $y authori2ed person on $ehal" o" plainti""---'e$it ad!ice !ouchers produced $y de"endants showing con!eyance charges paid to >odown Keeper !isiting godown+ and de$ited to account o" plainti""--->oods+ held+ in possession o" de"endant under pledge and not %erely http&..www(paksearch(co%.>o!ern%ent.C=;P=;4#).Contract.Q@6(ht%hypothecated( According to @C Milnes Aolden: FPledge arises when goods or 3docu%ents o" title o" goods thereto8 or $earer securities are deli!ered $y one person 3called the Pledger8 to another person 3called the Pledgee8 to $e held as a security "or the pay%ent o" a de$t or "or the discharge o" so%e other o$ligation+ upon the e9press or i%plied understanding that the su$Dect %atter o" the Pledge is to $e restored to the Pledger as soon as the de$t or other o$ligation is discharged( Copyright Virtual ni!ersity o" Pakistan 147
Banking Laws and Practices-BNK 601 VU <here a de"inite ti%e "or pay%ent has $een "i9ed+ the Pledgee has an i%plied power o" sale upon de"ault+ $ut i" there is no stipulated ti%e "or pay%ent+ the Pledgee %ay de%and pay%ent and in de"ault thereo" %ay e9ercise his power o" sale a"ter gi!ing notice to the Pledger o" his intention to do so( #he Pledgee has actual control o" pledged stocks.>oods( Pledgee can sell pledged stocks $y gi!ing reasona$le notice to the $orrower( Be"ore disposal Pledgee should pu$lish the notice through news papers etc( Termination o% &an$er+ Customer Relations)i(: #his relationship that is esta$lished $y the ti%e an account is opened %ay $e ter%inated $y either party in "ollowing %anner& o By Notice "ro% custo%er or o By notice "ro% $anker
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Banking Laws and Practices-BNK 601 &AN>ER+CUSTOMER RE4AT?ONSA?/ T#(es o% Customer3s Account General Re:uirements %or o(ening an account
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-- Co%pletion o" 4ccount =pening /or% 3 4=/8 ,ntroduction o" the prospecti!e custo%er and preli%inary in!estigations 3know your custo%er KIC8 =$taining speci%en :ignatures -andate regarding operation o" 4ccount Allocating Account number /reliminar# investigations 9?ntroduction o% Account ,ntroduction o" a new account re"ers to proper in!estigations a$out the credentials o" prospecti!e account holder $y the $anker( ," proper introduction not o$tained it would tanta%ount to negligence on the part o" $anker( ;etention o" photo copy o" CN,C o" 4ccount 1older as well as introducer o" account a"ter !eri"ying "ro% originals( 2)# ?ntroduction E /reliminar# ?nvestigation: ;a<C #o a!oid "rauds ;b<C :a"eguard against unintended.inad!ertent credits to an account $y %istake+ in case $anker has conducted proper preli%inary in!estigations and o$tained introduction it would $e help in "ollow up process Negligence in seeking proper introduction 0 %aking necessary preli%inary in!estigations leads to depri!ation o" $anker "ro% seeking protection o" law .: 1?1 o" Negotia$le ,nstru%ents 4ct 1CC1( ,n*uiries a$out client 3credit ;eports.status in*uiries8 "urnished $y $anks( ,n case account opened $y a $anker without proper in*uiriesNthe $ank "urnishing status in*uiries .etc( %ay at ti%es launch itsel" into trou$le( S(ecimen Signatures: ," "orged signatures on a Che*ue entertained 0 Che*ue passed $y $ank--$ank shall $e legally responsi$le to %ake good the loss to 4ccount 1older O(ening o% Account o% an ?lliterate /erson: Photograph on :(: Card #hu%p i%pression in the presence o" $ank o""icer to $e a""i9ed( L(#(, 3>ents8 ;(#(, 3Ladies8 T#(e o% Accounts: ,ndi!idualEs 4ccount Aoint 4ccount -inorEs 4ccount 4egal ?ssues 'it) res(ect to individual3s Account: 4 $ankerEs authority to pay che*ues is re!oked in the "ollowing situations as per pro!isions contained in section 1@@-4 o" Negotia$le ,nstru%ents 4ct+ 1CC1& Counter%and o" pay%ent 3stop pay%ent8 Notice o" custo%erEs death Notice o" 4dDudication o" the Custo%er as insol!ent @oint Accounts #hese accounts are not to $e treated as partnership accounts( #hese are the accounts opened in the na%e o" two or %ore persons who are not partners Copyright Virtual ni!ersity o" Pakistan 149
Banking Laws and Practices-BNK 601 O(erations o% @oint Account: --#he %andate %ust $ear the signatures o" all the account holders( Can $e operated Dointly $y all the account holders Can $e operated $y any one or %ore persons authori2ed to operate the account )ither or :ur!i!or .s %andate(
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Sto( /a#ment ?nstructions in a @oint Account 4ny one o" the Doint account holders can gi!e stop pay%ent instructions o" any che*ue to the $ankJ howe!er+ "or reinstate%ent o" the pay%ent o" such che*ue+ such instructions %ust $ear signatures o" all the account holders( Minor3s Account -inor does not ha!e legal capacity to enter into a contract( 4s we know that legal relationship $etween $anker and his custo%er is a contractual relationship+ as such %inor is not *uali"ied under law to open an account( 1owe!er+ an account in the na%e o" %inor can $e opened when guardian o" the %inor shall operate this account( 4ccording to law+ %inor is a person who has not attained the age o" 1C years( /urther %ore under section ? o" %aDority 4ct 1C6B+ i" a guardian is appointed $y the court in respect o" a person $e"ore he attains the age o" 1C years+ the %aDority e9tends to the age o" @1 years( Classi%ied Accounts o% t)e Customers Partnership 4ccount Co%panies 4ccount 4ccount o" Clu$s+ :ocieties 0 4ssociations( 4gentsE 4ccount #rust 4ccount )9ecutors 0 4d%inistratorsE 4ccount 4ccounts o" Local Bodies /artners)i( Account: L/artners)i(P is the relation $etween persons who ha!e agreed to share the pro"its o" a $usiness carried on $y all or any o" the% acting "or all ;ight to sue !ests in registered "ir%( Partner is treated as an agent o" "ir% 3:ection 1C o" Partnership 4ct( 15?@8 howe!erJ partner has no authority to open an account on $ehal" o" the "ir% 3:ection 15-@B8 :ur!i!orship %andate Aoint and se!eral %andates 4d%ission o" new partnerNresponsi$ilities o" inco%ing partner start "ro% the date o" ad%ission unless not otherwise agreed( Bankruptcy o" a partner-- ordinarily partnership stands dissol!ed( ,nsol!ency o" "ir%N$usiness o" partnership !ests in o""icial recei!er appointed $y court+ operations in account are stopped+ personal accounts o" partners are also declared inoperati!e( Accounts o% Com(anies 7ocuments Re:uired: ;esolution passed $y Board o" 'irectors "or opening the account Copy o" -e%orandu% o" 4ssociation Copy o" 4rticles o" 4ssociation Certi"icate o" ,ncorporation Certi"icate o" co%%ence%ent o" $usiness Balance :heet( =peration o" the account in line with the instructions contained in the $oard o" directors resolution+ authori2ed directors to operate the account( ,n case o" winding up o" a co%pany+ $ank should stop operations in the account( 150 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 Accounts o% Clubs, Societies E Association ;esolution passed $y %anaging co%%ittee.e9ecuti!e co%%ittee.>o!erning $ody etc( Certi"ied copy o" $y- laws.rules :ignatures o" the persons authori2ed to operate account(
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Agent Account 4gent acts on $ehal" o" the principal( 4gent can open an account under the authority o" principalN$ased on power o" attorney( =n re!ocation o" power o" attorney operation in the account will stand inoperati!e( ,n case death o" the agent operations should $e stopped i%%ediately howe!er+ Principal can sign the che*ues and the sa%e are honored $y the $anks( Account o% Trusts: #rusts are go!erned $y #rust 4ct-1CC@ 4ny person who is co%petent to contract %ay create a trust( O(ening o% Account 4ccount is opened in the na%e o" the #rust( 4ll trustees to sign account opening "or%( EBecutors E AdministratorFs Account )9ecutor is a person who is entrusted responsi$ilities o" e9ecuting <,LL( 4n ad%inistrator is a person appointed $y a court to look a"ter the estate o" a person who died without lea!ing a <,LL or the person appointed as e9ecutor is not co%petent to per"or% the contract 3"or e9a%ple %inors+ insol!ent+ lunatics8 #he $anks %ust care"ully study the contents o" the <,LL $e"ore opening an account o" )9ecutor.4d%inistrator( Accounts o% 4ocal &odies: #he accounts %ust $e in con"or%ity with local $odies law.rules( #he re*uest "or opening an account %ust $e %ade $y co%petent authority( 7i%%erence bet'een @oint Account E /artners)i( Account ;/ro%it Motive< O(eration o% @oint Account: ,nstructions to $e o$tained $y the $ank to $e operated $y one+ anyone or Dointly $y all or so%e o" designated person.persons( Sto( (a#ment legal (osition: 4ny o" Doint 4ccount holders has the authority to issue such instructions to $ank $ut not re!ocation thereo"( Aut)orit# to 7ra' C)e:ue b# T)ird /art#9Manager :uch authority--Aointly $y all 4ccount 1olders @oint Account: Above Aut)orit#9Mandate Revo$ed Automaticall# By death Bankruptcy 3insol!ency8 ,nsanity 3unsound %ind8 o" either or any account holder.s Survivors)i( in case o% deat) o% one or more o% t)e @oint A9c Aolder: 3)ither or :ur!i!or8 Aoint responsi$ility+ sur!i!ors not responsi$le "or pay%ent o" any de$t due to $ank $y deceased account holder+ howe!er right o" set o"" can $e e9ercised( Copyright Virtual ni!ersity o" Pakistan 151
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7eceased A9c Aolder ;in case o% joint account< 1owe!er+ in case o" Doint 0 se!eral %andates the a%ount o" de$t due to $ank $y deceased can $e set-o"" . reco!ered "ro% Doint account $alance to the e9tent o" a%ount owed $y the deceased( &an$ru(tc# o% @oint Account Aolder =perations to $e stopped 0 instructions should $e sought "ro% sol!ent custo%ers and o""icial assignee to who% all credit $alance will !est( T#(es o% Customer3s Account @oint Account ?n t)e event o% deat) =wnership !ests in Doint holders. sur!i!ing account holders and not to legal heirs o" the deceased( ?n t)e event o% 4unac# #hese articles on death o" a holder should $e deli!ered with the consent o" o""icial assignee or -anager o" Lunacy(
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Banking Laws and Practices-BNK 601 NEGOT?A&4E ?NSTRUMENTS Conce(t9 Object and /ur(ose o% Negotiable instruments
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The object and ,ur,ose of the ct is to legalise the system under #hich claims u,on certain mercantile instruments are treated like ordinary goods ,assing from hand to hand. The ct is not e1hausti2e of all matters relating to negotiable instruments nor does it ,ur,ort to deal #ith all kinds of negotiable instruments. $t merely regulates the issue and negotiations of bills notes and cheques and e2en as regards them it does not deal #ith its transmissions of rights in them by o,eration of la# or by assignment by deed. $n the absence of any e1,ress ,ro2isions in this ct to the contrary, the general rules contained in the Contract ct are a,,licable to such instruments as to obligations of ,arties to the negotiable instruments are contractual in nature. 3or e1am,le the ct does not declare #hat consideration is sufficient and 2alid for a bill or note and therefore any consideration #hich #ill su,,ort a sim,le contract #ill su,,ort a bill or a note also. T)is clause as (rovided in section * o% t)e Negotiable ?nstrument Act 66 is re(roduced )ere under: ,n this 4ct+ unless there is anything repugnant in the su$Dect or conte9t&Macco%%odation partyM %eans a person who has signed a negotia$le instru%ent as a %arker+ drawer acceptor or endorser without recei!ing the !alue thereo" and "or the purpose o" lending his na%e to so%e other personJ MBankerM %eans a person transacting the $usiness o" accepting+ "or the purpose o" lending or in!est%ent+ o" or deposits o" %oney "ro% the pu$lic+ repaya$le on de%and otherwise withdraw a$le $y che*ue+ dra"t+ order+ or otherwise+ and includes any Post =""ice :a!ings BankJ MBearerM %eans a person who $y negotia$le co%es into possession o" a negotia$le instru%ent+ which is paya$le to $earer+ M'eli!eryM %eans trans"er o" possession actual or constructi!e+ "ro% one person to anotherJ MissueM %eans the "irst deli!ery o" a pro%issory notice+ $ill o" e9change o" che*ue co%plete in "or% to a personH who takes it as holder ( M%aterial alterationM in relation to a Pro%issory note+ $ill+ o" e9change or che*ue includes an alteration o" the date+ the su% paya$le+ the ti%e o" pay%ent+ the o" pay%ent+ and+ where any such instru%ent has $een accepted generally+ the addition o" a place o" pay%ent without the acceptorHs assent+ and MNotary pu$licM includes any person appointed $y the Central >o!ern%ent to per"or% the "unctions o" notary pu$lic under this 4ct and a notary appointed under the Notaries =rdinance+ 1561( Explanation #he words F%aterial alterationG is not de"ined in the 4ct+ $ut in the de"inition clause with re"erence to negotia$le instru%ent these words are "ollowed $y FincludeG+ which has an e""ect o" enlarging the scope o" the already understood %eaning o" the words( #he de"initions e9tends the scope o" the words to take into its "olds the change or alteration in relation to the date+ su% paya$le+ ti%e and place o" pay%ent with re"erence to negotia$le instru%ent( ,t %eans any %aterial and su$stantial change+ !ariation+ %odi"ication+ su$stitution+ insertion+ erosion+ addition or alteration in the contents or $ody o" the negotia$le instru%ent including any alteration o" date+ the su% paya$le+ the ti%e and place o" pay%ent a"ter its due e9ecution which a""ects the rights+ lia$ilities or legal position o" a party(
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Banking Laws and Practices-BNK 601 Some o% t)e im(ortant conce(ts as discussed in t)e Act are given belo': Negotiable %eans the *uality o" trans"era$ility $y deli!ery or $y endorse%ent and deli!ery(
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?nstrument %eans a written docu%ent $y which a right is created in "a!or o" so%e person( Negotiable ?nstrument %eans a written docu%ent+ which is "reely trans"era$le and which creates a right in "a!or o" so%e person to recei!e so%e %oney( Negotiable ?nstrument as de%ined in section * o% t)e Act is given belo': F4 negotia$le instru%ent %eans a pro%issory note+ $ill o" e9change or che*ue paya$le either to order or to $earerG( #he 4ct $esides a$o!e three negotia$le instru%ents recogni2es any other instru%ent satis"ying the characteristics o" negotia$ility+ as a Negotia$le ,nstru%ent( Quasi Negotiable ?nstrumentsD the negotia$le ,nstru%ents 4ct+ 1CC1 $esides the three negotia$le instru%ents as contained in section 1? also recogni2es the "ollowing instru%ents as negotia$le instru%ent( #hese are called Quasi Negotia$le ,nstru%ents( 'i!idend <arrants :hare <arrants Bearer 'e$entures >o!ern%ent Pro%issory Notes etc( /romissor# Note ,t has $een de"ined in section 7 o" the 4ct which is gi!en here under& F4 pro%issory note is an instru%ent in writing 3not $eing a $ank note or a currency note8 containing unconditional undertaking+ signed $y the %aker to pay on de%and or at a "i9ed or deter%ina$le "uture ti%e a certain su% o" %oney only to or to the order o" a certain person+ or to the $earer o" the instru%ent( S(ecimen o% a /romissor# ;s( 100+000.-
Lahore
4ugust @0+ @006 #hirty days a"ter date+ , pro%ise to pay -r( 4h%ad Ka%al or order the su% o" rupees one hundred thousand only "or !alue recei!ed( :ignature Iasir -eh%ood 3#he -aker8 EB(lanation #he de"inition o" pro%issory note as gi!en in the 4ct is %uch the sa%e as that in section C? 318 o" the Bills o" )9change 4ct( #his and the "ollowing sections atte%pts to de"ine di""erent kinds o" negotia$le instru%ents dealt with $y the 4ct( #o understand the essentials o" a negotia$le instru%ent we ha!e to $ear in %ind the purpose o" such instru%ents+ which is+ that they %ay represent %oney and do all the work o" %oney in $usiness transactions( ,t is o$!ious+ there"ore+ that the "irst and essential re*uisite is certainty( Certainty as to the person to %ake the pay%ent+ the person to recei!e it+ the ti%e and place o" pay%ent+ the conditions o" lia$ility+ and also as to the a%ount to $e paid( #hese sections endea!or to 154 Copyright Virtual ni!ersity o" Pakistan ;e!enue :ta%p
Banking Laws and Practices-BNK 601 VU de"ine these certainties not F in such e9act and technical way as would only e%$arrass the transaction o" $usiness $ut su$stantially+ in a per"ect and practical way( F 4 pro%issory note %ay $e in the "or% o" a letter or in any other "or% o" words which "ul"ill the re*uire%ents o" this section+ and "ro% which the intention to %ake a note appears( Ao' (romissor# note di%%ers %rom agreement: ,t depends upon the circu%stances and wording in each case as to whether a docu%ent is a pro%issory note or an agree%ent( =ne o" the tests to $e applied to "ind out is the intention o" the parties( #he second is whether the docu%ent as drawn out can $e said to $e negotia$le+ that is to say+ could a third person "ile a suit on the strength o" the docu%ent( ," he could not+ then it is a %ere agree%ents+ where the docu%ent clearly stated that the a%ount was kept in deposit the %ere "act that the docu%ent $ore twenty "i!e paisa sta%ps and the i%pression o" the scri$e would not %ake it a pro%ote( Notice to suret#: 'eli!ery o" notice to surety is not a condition precedent "or %aking hi% lia$le on a negotia$le instru%ent i" the %aker does not pay /roo%: 4 party seeking to pro!e a pro%issory note need not go $ehind the pro%issory note+ he has only to pro!e due e9ecution o" the note( <here the plainti"" $ank produced two witnesses who categorically stated all docu%ents including pro%issory notes+ hypothecation agree%ent+ letter o" re!i!al and $alance credit slips ha!ing $een signed $y the de"endant+ no e!idence was produced $y de"endant to discharge the $urden placed upon hi% in the "ace o" the positi!e e!idence produced $y the plainti""+ the genuineness o" the pro%issory note stood pro!en nder 4rticle 6? o" the Li%itation 4ct+ a suit $ased on a pro%issory note paya$le on de%and has to $e "iled with in ? years "ro% the date o" the note( nder 4rticle 67-4 a suit under =rder SSSV,, o" the Code o" Ci!il Procedure+ is re*uired to $e "iled within ? years "ro% the date when the de$t $eco%es paya$le i%%ediately where a pro%issory note %akes it o$ligatory on the holder to sue on e9piry o" three days a"ter notice to pay was gi!en+ li%itation o" the suit $egins three days a"ter the notice to pay was gi!en( -ere "act that there was an oral understanding $etween the parties to return the a%ount within three %onths+ would not take away the unconditional e""ect o" the pronote( /romissor# Note: Proo" o" pro%issory note+ would $e un*uestiona$le when witnesses were su$Dected to lengthy crosse9a%ination $ut noting was e9tracted to de%olish their credi$ility and neutrality( Pro%issory note is not re*uired to $e attested( ;e*uire%ent as to attestation o" pro%issory note prescri$ed in 4rt( 16 3@8 3a8+ Qanun-e-:hahadat+ 15C7+ would not o!erride Negotia$le ,nstru%ents 4ct+ 1CC1 which does not re*uire attestation o" pro%issory note( 2e s)all carr# on 'it) t)e negotiable instruments in t)e coming 4essonsC
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Banking Laws and Practices-BNK 601 NEGOT?A&4E ?NSTRUMENTS
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/romissor# Note: <e ha!e already gone through the de"inition o" pro%issory note and also had a !iew o" a speci%en o" a pro%issory noteJ we shall continue to e9plore the other aspects o" pro%issory note( T)e notes ')ic) do not :uali%# to be called /romissor# note: <e are discussing $elow so%e o" the notes which do not *uali"y to $e called pro%issory note in the light o" de"inition contained in section 7& #hirty days a"ter date+ , pro%ise to pay -r( 4h%ad Ka%al or order the su% o" rupees one hundred thousand only and the a%ounts which %ay $e due to 4h%ed Ka%al $y due date( --#his is not the pro%issory note since the a%ount pro%ised is not certain and ascertaina$le on the date o" %aking the pro%ise. undertaking( #he notes gi!en $elow do not *uali"y to $e called pro%issory note in the light o" de"inition contained in section 7 ? o'e Rs 88,888 to MRC A)mad >amal --#his is not a pro%issory note since it is Dust an acknowledge%ent not an undertaking ? (romise to (a# Rs 88,888 to MrC A)mad >amal t)irt# da#s a%ter getting admission in a Universit#C --#his is not a pro%issory note since the ti%e o" pay%ent is not certain. ascertaina$le at the ti%e o" %aking the pro%ise( T)e section 1 o% t)e Act recogniHes t)ree $inds o% (romissor# notes:+ 4 pro%ise to pay a certain su% o" %oney to a person( 4 pro%ise to pay a certain su% o" %oney to the order o" a certain person( #his is ne!ertheless paya$le to the person na%ed or his order( 4 pro%ise to pay the $earer( #he %ain *uestion in deciding whether a docu%ent is a pro%issory note is to consider not whether it is negotia$le or not $ut to consider whether in su$stance and pri%ary intention it was a note and whether it contains the necessary recitals and is not intended to record a di""erent kind o" transaction altogether( #he *uestion whether the words in docu%ents a%ount to %ere acknowledge%ent or to a pro%ise has to $e decided on the intention as %entioned a$o!e and the real characteristics o" the docu%ent( -ere re"erence to account in the pro%issory note does not %ake it any the less a pro%issory note( <hen the re*uire%ents o" the section are satis"ied+ a pro%issory note is not the less a note $ecause it contains a recital that the %aker has deposited title deeds with the payeeJ or $ecause it is attested $y witnesses+ or $ecause it re"ers to an agree%ent which does not+ howe!er+ *uali"y the note+ or $ecause the words Fsecurity "or o!erdra"tG are "ound printed upon it or $ecause it contains a pro%ises to pay at certain place( /arties to t)e /romissor# Note 4s we already know that there are "ollowing parties in a pro%issory note -aker 0 Payee 156 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 Essentials o% a /romissor# Note: 4 pro%issory note %ust "ul"ill the "ollowing re*uire%ents& ,t should $e in writing #here %ust $e pro%ise. undertaking to pay #he pro%ise.undertaking should $e unconditional ,t should $e signed $y %aker -aker %ust $e a certain person Payee %ust also $e a certain person #he a%ount to $e paid %ust $e certain Legal tender %oney is to $e paid under a pro%issory note #i%e o" pay%ent to $e ascertaina$le ,t should $e properly sta%ped under sta%p 4ct( Pro%ise to pay %ust $e "or law"ul consideration Pro%issory note %ust %aintain the date o" issue and place o" issue(
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EB(lanation: Sum to (a# must be onl# mone# and certain: ,t is also necessary that the %ediu% o" pay%ent %ust $e %oney only that is specie or other legal currency+ and not $onds+ $ills+ notes or any article other than %oney( But it is not necessary that the %oney to $e paid %ust $e that current in the place o" pay%ent+ or where the $ill is drawn+ it %ay $e in the %oney "or% o" any country whate!er( #he a%ount pro%ised to $e paid %ust $e certain and incapa$le o" $eing !aried $y inde"inite editions or deductions( ," the a%ount is not capa$le o" $eing ascertained o" the "ace o" the instru%ent+ that instru%ent will not $e a pro%issory note( LTo or to t)e order o% certain (ersonP 4n instru%ent that does not own it "ace indicate to who% the %oney is paya$le is not a pro%issory note( But where it is clear "ro% the instru%ent itsel" who the payee is+ it in not necessary that the na%e o" the payee %ust appear in that part o" the note which e9presses a pro%ise to pay( #here"ore a pro%issory note %ade in "a!or o" a person descri$ed $y his o""ice is one %ade in "a!or o" certain person and is !alid( 4 pro%issory note paya$le to %anage o" a $ank is paya$le to a certain person( But where the payee is descri$ed only as FyouG the instru%ent is not a pro%issory note( Signature: #he 4ct contains no de"inition o" the ter% F signatureG it includes the %ark %ade $y a person who is una$le to write his na%e such signature need not $e al the "oot or at any particular part o" the docu%ent( <here the intention o" the parties is clear+ the position o" a signature on a $ill is i%%aterialJ i" the %aker writes his na%e to a $ill or note on any part o" it so as to authenticate it and to gi!e e""ect to the contract $y hi% thereon( ,t will $e su""icient( 4 signature to a $ill %ay $e in pencilJ it %ay $e lithographed+ and e!en printedJ in which case howe!er+ it %ust $e shown to ha!e $een adopted and used $y the party as his signature+ or again+ the a""i9ing o" the "acsi%ile o" a na%e 3 e(g( $y ru$$er sta%p8 is good as signature( Plainti"" had esta$lished his case on the $asis o" e!idence $oth docu%entary as well as oral and the #rial Court decreed the suit against the de"endant( Contents o" the docu%ent would $ring the docu%ent within the de"inition o" pro%issory note( 1eading gi!en to such docu%ent was not legally rele!ant( 'ocu%ent "or%ing $asis o" the decree against the de"endant was in "act a pro%issory note as de"ined in section 7 o" negotia$le instru%ents 4ct+ 1CC1+ e!en though the sa%e was descri$ed as a pronote( Copyright Virtual ni!ersity o" Pakistan 157
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2riting: #he instru%ent %ay $e written on paper+ parch%ent+ or any other con!enient su$stitute "or paper( F<ritingG would $e held to include printing+ engra!ing+ lithographing+ and in "act e!ery %ode $y which words and "igures can $e e9pressed on any %aterial( #he writing %ay $e in pencil or in ink+ $ut the i%per"ection o" the "or%er %ode o" writing and its lia$ility to o$literation pre!ent its $eing generally adopted( #he "act that a pro%issory note is written on a page in an account $ook o" the creditor does not %ake it illegal or any the less a pro%issory note( #here is nothing in the Negotia$le ,nstru%ent 4ct to %ake e!en a pro%issory note not negotia$le $y e9press ter%s or $y necessary i%plication( Signature onl# on stam(: <here de"endant denied the e9ecution o" pro%issory note $ut did not deny signature on re!enue sta%p a""i9ed on the pronote( Contention o" de"endant was that he did not sign $eyond the re!enue sta%p+ his signature was "or the pay%ent o" salary and pro%issory note was the result o" "raud( #he Court reDected the contention( Unconditional underta$ing: ,n a pro%issory note there %ust $e an unconditional undertaking to pay+ and the note %ust $e paya$le at all e!ents( <hen a pro%ise to pay is said o $e conditional and when not+ is e9plained in section B( 4 letter re*uesting a loan+ and stating that the a%ount lent will $e repaid is not such an unconditional undertaking+ $ecause the repay%ent is dependent on the ad!ance $eing %ade( But %entioning a place o" pay%ent is not such a condition under the section as to %ake it not a pro%issory note( -ere acknowledge%ent o" inde$tedness is not su""icient( &ill o% eBc)ange ,t is an i%portant "or% o" a negotia$le instru%ent and has $een de"ined in section B o" the 4ctJ the said de"inition is reproduced $elow& F4 $ill o" e9change is an instru%ent in writing containing an unconditional order+ signed $y %aker+ directing a certain person+ to pay on de%and or at "i9ed or deter%ina$le "uture ti%e a certain su% o" %oney only to+ or to the order o"+ a certain person or to the $earer o" the instru%entG( S(ecimen o% bill o% eBc)ange ;s( 100+000.-
Lahore 4ugust @0+ @006
Ninety days a"ter date+ pay to -r( 4h%ad Ka%al or order rupees one hundred thousand only "or !alue recei!ed :ignature Iasir -eh%ood 3'rawer8 ;e!enue :ta%p Essentials o% bill o% eBc)ange #hese are outlined here under& 158 Copyright Virtual ni!ersity o" Pakistan 4ccepted $y 'rawee
SIZ 3'rawee8
Banking Laws and Practices-BNK 601 ,n writing =rder to pay nconditional order :igned $y the drawer 'rawee certain person #i%e o" pay%ent Certain su% Legal tender %oney Payee certain person =ther "or%alities 'ate Place Law"ul consideration ;e!enue sta%p
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EB(lanation o% di%%erent %eatures o% a bill o% eBc)ange: 4 pro%ise or order to pay is not Fconditional+ within the %eaning o" this section and section 7+ $y reason o" the ti%e "or pay%ent o" the a%ount or any install%ent thereo" $eing e9pressed to $e on the lapse o" a certain period a"ter the occurrence o" a speci"ied e!ent which+ according to the ordinary e9pectation o" %ankind+ is certain to happen+ although the ti%e o" its happening %ay $e uncertain( #he su% paya$le %ay $e FcertainG within the %eaning o" this section and section 7+ although it includes "uture interest or return in any other "or% or is paya$le at an indicated rate o" e9change+ or is paya$le at the current rate o" e9change and although it is to $e paid in stated install%ents and contains a pro!ision that on de"ault o" pay%ent o" one or %ore install%ents or interest( =r return in any other "or% the whole or the unpaid $alance shall $eco%e due( 4 pro%ise order to pay is not KconditionalE nor is the su% paya$le uncertain within the %eaning o" this section or section 7 $y reason o" the su% paya$le $eing su$Dect to adDust%ent "or pro"it or loss+ as the case %ay $e o" the $usiness o" the %aker( <here the person intended can reasona$ly $e ascertained "ro% the pro%issory note or the $ill o" e9changeJ he is a Kcertain personE within the %eaning o" this section and section 7+ although he is %isna%ed or designated $y description only( 4n order to pay out o" a particular "und is not unconditional within the %eaning o" this sectionJ $ut an un*uali"ied order to pay+ coupled withN an indication o" a particular "und out o" which the drawee is to rei%$urse hi%sel" or a particular account to $e de$ited to the a%ount+ or a state%ent o" the transaction which gi!es rise to the note o" $ill+ in unconditional 4n essential character o" a $ill o" e9change is that it shall contain an order to accept or to pay and that acceptor should accept it+ in the a$sence o" such a direction to pay the docu%ent will not $e a $ill o" e9change or a hundi( #he "ollowing are the ingredients o" a $ill o" e9change& ,t %ust in writing ,t %ust contain an order to pay and addressed to so%e person #he order %ust $e unconditional Copyright Virtual ni!ersity o" Pakistan 159
Banking Laws and Practices-BNK 601 VU #he order %ust $e signed $y the %aker #he order %ust direct to pay or de%and or at a "i9ed or deter%ina$le "uture ti%e( #he su% ordered to $e paid %ust $e certain( #he pay%ent should $e ordered to $e paid to a certain person+ or to his order+ or to the $earer( Order s)ould be unconditional: #he drawerEs order to the drawee %ust $e unconditional and should not %ake the pay%ent o" the $ill dependent on a contingency( <here an instru%ent is e9pressed to $e paya$le on a contingency+ it does not cease to $e in!alid $y the happening o" the e!ent $e"ore the e9piry o" the period "i9ed "or the per"or%ance o" the o$ligation+ "or the instru%ent %ust $e !alid a$ initio+ and carry its !alidity on its "ace( 7ra%ts: 4 $ankerEs dra"t is a $ill drawn either on de%and or otherwise $y one $ank on another in "a!or o" third party+ or $y one $ranch o" a $ank on another $ranch o" the sa%e $ank+ or $y the head o""ice on a $ranch+ or !ice !ersa( ,t is a $ill o" e9change and there"ore a negotia$le instru%ent( #he issue o" a dra"t is regarded in $anking practice as a %atter o" purchase and ordinarily the relationship $etween the holder o" a de%and dra"t and the $ank issuing it is that o" de$tor and creditor( "uture interest, etc: ," the su% paya$le includes "uture interest+ or is paya$le at an indicated rate o" e9change+ or is according to course o" e9change+ the su% paya$le shall $e considered to $e FcertainG although the instru%ent %ay pro!ide that on de"ault o" pay%ent o" an install%ent the whole o" unpaid $alance shall $eco%e due( Certain (erson: 4lthough a certain person is %isna%ed or designated $y description only+ yet the person shall $e FcertainG i" it is clear as to who is the person to who% direction is gi!en or pay%ent is to $e %ade( ,nstru%ent %ust contain an order to pay %oney and %oney only& ,n order that an instru%ent %ay a%ount to a pro%issory note+ it is essential that the %ediu% o" pay%ent %ust $e %oney only( ,t should not consist in any article o" "ood or any ani%al or in any $onds+ si%ply or coupled with %oney in specie( ," a"ter issuing a che*ue the drawer keeps *uiet and takes no steps to in"or% the $ank in ti%e i(e( $e"ore the che*ue is encased that the che*ue should not $e according to section 10 o" the Negotia$le ,nstru%ents 4ct+ %eans pay%ent in accordance with the apparent tenor o" the instru%ent in good "aith+ the lia$ility "or the drawn che*ue shall a$solutely and s*uarely "all on the drawer( 7i%%erence bet'een (romissor# note and bill o% eBc)ange: ,n a pro%issory note the e9ecutants pro%ises hi% to pay while in a $ill o" e9change he directs another to pay( ,n a $ill o" e9change the person lia$le is responsi$le to e9ecutants and not scri$e ,n a pro%issory note the %aker is the principal de$tor( ,n the case o" $ill o" e9change the drawer is surety( 4 $ill o" e9change can $e accepted conditionally while a pro%issory note cannot $e so %ade( 4 pronote cannot $e %ade paya$le to the %aker hi%sel"( ,n a $ill o" e9change this is possi$le and one person %ay $eco%e $oth drawer and payee or $oth drawee and payee(
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Banking Laws and Practices-BNK 601 VU ,n pro%issory notes there are two partiesNthe pro%isor and the pro%isee 3the %aker and the payee8( ,n the case o" $ills o" e9change there are three partiesNthe drawer 3who %akes the order8+ the drawee+ the $ill is drawn8( #he %ost i%portant distinction is that in the case o" a pro%issory note the %aker unconditionally undertakes to pay the a%ount %entioned in the pronote while in the case o" a $ill o" e9change the %aker gi!es an unconditional order directing another person to pay( ," ,nterest on a pro%issory note is su$se*uently increased $y agree%ent o" the parties( #he guarantors o" the pro%issory note are not discharged i" the suit is $rought on the original pro%issory note(
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Banking Laws and Practices-BNK 601 LESSON 27 NEGOT?A&4E ?NSTRUMENT
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4nother i%portant type o" negotia$le instru%ent is che*ue( Che*ue as de"ined in section 6 o" the 4ct is gi!en $elow& C)e:ue F4 che*ue is a $ill o" e9change drawn on a speci"ied $anker and not e9pressed to paya$le otherwise than on de%andG( /arties: #here are three parties in the che*ue which are as under& o 7ra'er o 7ra'ee ;in case o% c)e:ue, dra'ee is al'a#s a ban$er< o /a#ee Essentials o% a C)e:ue: 4 che*ue %ust "ul"ill the "ollowing re*uire%ents& ,t %ust $e in writing ,t should contained unconditional order ,t %ust $y signed $y drawer Che*ue is always paya$le on de%and #he che*ue is always drawn on a speci"ied $anker 4s a %atter o" practice+ che*ue lea!es are in printed "or% #he a%ount paya$le should $e speci"ied in the "or% o" legal tender %oney and is paid accordingly( #he a%ount %ust $e certain a%ount #he che*ue is paya$le to speci"ied person or order o" or to $earer( 'ate o" issue %ust $e %entioned on the che*ue( EB(lanation: 4 che*ue is a peculiar sort o" instru%ent in %any ways rese%$ling a $ill o" e9change+ $ut in so%e entirely di""erent( ,n the ordinary course+ it is ne!er accepted+ it is not intended "or circulation+ it is gi!en "or i%%ediate pay%ent+ it is not entitled to days o" grace( ,n addition+ a che*ue is presented "or pay%ent+ whereas a $ill in the "irst instance is presented "or acceptance+ this is not so in the case o" a che*ue+ $ecause the holder o" a che*ue+ as $etween hi%sel" and the drawer+ has no right to re*uire acceptance( 4 che*ue is not intended "or circulationJ it is gi!en "or i%%ediate pay%entJ it is not entitled to days o" graceJ and though it is+ strictly speaking an order upon a de$tor $y a creditor to pay to a third person the whole or part o" a de$t+ yet+ in the ordinary understanding o" persons+ it is not so considered( T#(es o% C)e:ues: #he che*ues can $e di!ided in the "ollowing "or%s& &earer C)e:ues: ,n this type cash is paya$le to anyone presenting the che*ue "or pay%ent at the cash counter o" $ankR Order C)e:ues :uch che*ues are paya$le to the speci"ied person on proper identi"ication o" the payee( Crossed C)e:ues
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Banking Laws and Practices-BNK 601 VU Crossing %ay $e o" di""erent types+ we shall discuss all these types o" crossing( 1owe!er i" the che*ue is crossed as payees account only such che*ues cannot $e paid at the cash counter o" the $ank and these %ust $e credited to the $ank account o" the payee( &rossed &heques and their &ollection Crossing o% c)e:ues& #he che*ues are o" two typesNopen 3uncrossed8 che*ues and crossed che*ues( Pay%ent o" a che*ue $y the drawee $anker depends upon whether the che*ue is open or crossed( #he pay%ent o" open che*ue is %ade at the counter o" the $anker on its presentation( #he open che*ue is lia$le to a great risk in the course o" circulation( :ince an open che*ue is paya$le to a $earer+ it in!ol!es a risk o" pay%ent to any person+ i" it is lost( ,n order to a!oid such risk and to protect the interest o" the genuine holder+ the syste% o" crossing the che*ues was introduced( ,n case o" a crossed che*ue+ pay%ent can $e o$tained only through a $anker( #hat is+ the payee or the holder+ ha!ing an account in a $ank+ has to deposit the crossed che*ue "or collection+ and draw the %oen ywhen the che*ue is collected and the proceeds are credited to his account( ,t is only with a !iew to a!oiding any such risk o" "raud that $usiness%en introduced the di!ice o" crossing( #hus+ crossing o" a che*ue %ay $e de"ined as+ F a direction to the drawee $anker to pay the %oney on a crossed che*ue through a $anker+ so that the party getting the pay%ent o" a crossed che*ue %ay $e easily tracea$le(G T#(es o% Crossing #here are two types o" crossing 1( >eneral Crossing @( :pecial Crossing( General Crossing: 4 che*ue is said to contain a general crossing when two parallel lines are drawn across the "ace o" the che*ue( 4ccording to :ec( 1@?( F where a che*ue $ears across its "ace an addition o" the words F and co%panyG or any a$$re!iation thereo"+ $etween two parallel trans!erse lines+ or o" two parallel trans!erse lines si%ply+ either with or without the words F not negotia$leG+ that addition shall $e dee%ed a crossing+ and the che*ue shall $e dee%ed to $e crossed generally(G 4 che*ue is said to $e crossed when two parallel trans!erse lines+ with or without any words+ are drawn on the le"t hand top corner o" the che*ue( ,t is rele!ant to state that such lines are essential "or general crossing and %ay not $e drawn in case o" special crossing( S(ecial Crossing: :ec( 1@7 o" the 4ct de"ines special crossing as F<here che*ue $ears across its "ace an addition o" the na%e o" a $anker+ either with or without the word Fnot negotia$leG that addition shall $e dee%ed a crossing+ and che*ue shall $e ee%ed to $e crossed specially and to $e crossed to that $anker(G /urther+ :ec( 1@6+ Para @ states F<here a che*ue is crossed specially the $anker on who% it is drawn shall not pay it otherwise than to the $anker to who% it is crossed+ or his agent+ "or collection( ,n the case o" special crossing the paying $anker is to honour the che*ue only when it is presented through the $ank %entioned in the crossing or an agent o" such $ank+ "urther+ sec( 1@6 states+ F<here a che*ue is crossed specially to %ore than one $anker+ e9cept when crossed to an agent "or the purpose o" collection+ the $anker on who% it is drawn shall re"use pay%ent thereo"( F 4 special crossing %akes the che*ue sa"er than a general crossing $ecause now a thie" will ha!e to search an account-holder o" that particular $ank only whose na%e appears in the crossing which %ay only create %ore di""iculty( Account /a#ee ;Restrictive crossing< 4lthough the 4ct is silent with regard to this "or% o" crossing+ it has $een recogni2ed $y custo% a%ongst $usiness%en and $ankers( #he words Kaccount payeeE within a general or a special crossing+ are a direction to the collecting $anker to collect and credit the payeeJs account with the proceeds o" the Copyright Virtual ni!ersity o" Pakistan 163
Banking Laws and Practices-BNK 601 VU che*ue( ,t %eans that a che*ue %arked Kaccount payee onlyE or 4.c PayeeE or KPayeeEs 4.cE ha!e sa%e signi"icance( ," the $anker goes against this order+ he will $e guilty o" negligence( 1ence Faccounts payee onlyG crossing is not negotia$le practically+ as $anks will collect it on $ehal" o" no person other than the payee( Not Negotiable Crossing: #he words KNot negotia$leE %ay also $e written in $oth types o" crossingNgeneral and special and a crossing with these words is said to $e KNot Negotia$leE crossing( :ection 1?0 states that F 4 person taking a che*ue crossed generally or specially+ $earing in either case the words F not negotia$leG shall not ha!e+ and shall not $e capa$le o" gi!ing+ a $etter title to the che*ue than that which the person "ro% who% he took it had( #he o$Dect o" K not negotia$leE crossing is to a""ord protection to the holder or drawer o" a che*ue+ $ecause e!en i" such a che*ue goes to wrong hands and "ro% there it is trans"erred to holder in due course+ the true owner will not lose his clai% against an indorsee( #hus an indorsee o" such a crossed che*ue %ust not accept the che*ue unless he knows the indorser !ery well and is con!inced a$out his ha!ing a good title thereto( 2)o ma# Cross a C)e:ueG Crossing o" an uncrossed che*ue does not a%ount to a %aterial alteration so as to a""ect the !alidity o" the instru%ent( 4part "ro% the drawer o" a che*ue crossing it generally or specially at the ti%e o" issue+ the holder o" a che*ue and also the $anker %ay cross it( :ection 1@B per%its the crossing $eing %ade e!en a"ter issue o" a che*ue in the "ollowing ways& 1( 3:ec 1@B8 F<here a che*ue is in crossed+ the holder %ay cross it generally or specially( @( <here a che*ue is crossed generally+ the holder %ay cross it specially( ?( <here a che*ue is crossed generally+ or specially+ the holder %ay add the word Fnot negotia$leG( 7( <here a che*ue is crossed specially+ the $anker to who% it is crossed %ay again cross it specially+ to another $anker+ his agent+ "or collection(G Crossing once %ade is a %aterial part o" the che*ue and its alteration e9cept in the a$o!e cases will a%ount to a %aterial alteration( #hus+ i" a special crossing on a che*ue ,s altered $y the holder into a general crossing $y striking out the na%e o" the $anker+ it will $e unauthori2ed( Crossing once %ade $eca%e %aterial part o" the che*ue and only the drawer o" the che*ue is entitled to cancel or open the crossing $y writing the words F pay cashG and cancelling the crossing along with his "ully signature( #hus+ where a che*ue is crossed Kaccount payeeE and the holder alters it into a general crossing $y striking out the words Kaccount payeeE+ the alteration is irregular and discharges the instru%ent( Various (rovisions o% negotiable instrument Act 66 'it) regard to c)e:ue: #he 4ct deals with !arious aspects regarding the che*ues which are appended hereunder "or re"erence( ?nstruments (a#able on demand: Sec 4 pro%issory note or $ill o" e9change is paya$le on de%and+ --;a<C <here it is e9pressed to $e so+ or to $e paya$le at sight or on present%entJ or ;b<C where no ti%e "or pay%ent is speci"ied in itJ or ;c<C where the note or $ill accepted or endorsed a"ter it is o!erdue+ as regards the person accepting or indorsing it Anti+dating and (ost+dating: sec ! C 4 pro%issory note+ $ill o" e9change or che*ue is not in!alid $y reason only that iJ is anti-dated or postdatedJ Pro!ided that the anti-dating or post-dating does not in!ol!e any illegal or "raudulent purpose or transaction( 4iabilit# o% legal re(resentative signing: Sec !-
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Banking Laws and Practices-BNK 601 VU 4 legal representati!e o" a deceased person who signs his na%e to a pro%issory note+ $ill o" e9change or che*ue is lia$le personally thereon unless he e9pressly li%its his lia$ility to the e9tent o" the assets recei!ed $y hi% as such( Signature essential to liabilit#: sec !-+A No person is lia$le as %aker+ drawer+ endorser or acceptor o" a pro%issory note+ $ill o" e9change or che*ue who has not signed it as such& Pro!ided that where a person signs any such instru%ent in a trade or assu%ed na%e he is lia$le thereon as i" he had signed it in his own na%e( "orged or unaut)oriHed signature: Sec !-+& :u$Dect to the pro!isions o" this 4ct+ where a signature on a pro%issory note+ $ill o" e9change or che*ue is "orged or placed thereon without the authority o" the person whose signature it purports to $e+ the "orged+ or unauthori2ed signature is wholly inoperati!e+ and no right to retain the instru%ent or to gi!e a discharge there"ore or to en"orce pay%ent thereo" against any party thereto can $e ac*uired through or under that signature+ unless the party against who% it is sought to retain or en"orce pay%ent o"H the instru%ent is precluded "ro% setting up the "orgery or want o" authority& Pro!ided that nothing in this section shall e""ect the rati"ication o" an unauthori2ed signature not %ounting to a "orgery( Stranger signing instrument (resumed to be endorser: Sec !-+C 4 person placing his signature upon a negotia$le instru%ent otherwise than as %aker+ drawer or acceptor is presu%ed to $e an endorser unless he clearly indicates $y appropriate words his intention to $e $ound in so%e other capacity( 4iabilit# o% dra'ee o% c)e:ue: Sec * #he drawer o" a che*ue ha!ing su""icient "unds o" the drawer in his hands properly applica$le to the pay%ent o" such che*ue %ust pay the che*ue when duly re*uired so to do+ and+ in de"ault o" such pay%ent+ %ust co%pensate the drawer "or any toss or da%age caused $y such de"ault( 2)en is a ban$er justi%ied in dis)onoring c)e:ues: )e 'ill be justi%ied:+ ;a<C ," the $anker has not su""icient "unds o" the drawer with hi%( ;b<C ," the $anker has su""icient "unds $ut they are not properly applica$le to the pay%ent o" che*ue( ;c<C ," the che*ue is not duly presented "or pay%ent( ;d<C ," the che*ue is not presented within reasona$le ti%e a"ter the issuing date( sually a period o" si9 %onths has $een considered as the reasona$le ti%e( ;e<C ," the che*ue is post-dated and is presented $e"ore actual date( ;%<C <hen the custo%er draws the che*ue on one $ranch while he has account in another $ranch o" the sa%e $ank( ;g<C <hen the custo%er counter%ands pay%ent( 2)en a ban$ is bound to dis)onor t)e c)e:ue: )e 'ill be bound to dis)onor:+ ;a<C ," the che*ue is irregular+ a%$iguous+ etc ;b<C ," the custo%er is dead and the $anker has notice o" the sa%e( ;c<C ," the "unds are su$Dect to a lien ;d<C ," the custo%er $eco%es insol!ent o" which "act the $anker has recei!ed notice( ;e<C ," the custo%er $eco%es lunatic and the $anker has notice thereo"( /resentment o% c)e:ue to c)arge dra'er: Sec 5! :u$Dect to the pro!isions o" section C7+ a che*ue %ust+ in order to charge drawer+ $e presented at the $ank upon which it is drawn $e"ore the relation $etween the drawer and his $anker has $een altered to the preDudice o" the drawer( Copyright Virtual ni!ersity o" Pakistan 165
Banking Laws and Practices-BNK 601 VU 2)en c)e:ue not dul# (resented and dra'er damaged t)ereb#& Sec 61 ; < <here a che*ues is not presented "or pay%ent within a reasona$le ti%e o" its issue+ and he drawer or person on whose account it is drawn had the right+ at the ti%e when present%ent ought to ha!e $een %ade+ as $etween hi%sel" and the $anker+ to ha!e the che*ue paid and su""ers actual da%age through the delay+ he is discharged the e9tent o" such da%age+ that is to say+ to the e9tent to which such drawer or person is a creditor o" the $anker to a larger a%ount than he would ha!e $een i" such che*ue had $een paid( ;!< ,n deter%ining what a reasona$le ti%e is+ regard shall $e had to the nature o" the instru%ent+ the usage o" trade and o" $ankers+ and the "acts o" the particular case( ;*< #he holder o" the che*ue as to which such drawer or person is so discharged shall $e a creditor+ in lieu o" such drawer or person+ o" such $anker to the e9tent o" such discharge and entitled to reco!er the a%ount "ro% hi%( ?llustrations ;a<C 4 draws a che*ue "or ;s( 1+000 and when the che*ue ought to $e presented+ has "unds at the $ank to %eet it( #he $ank "ails $e"ore the che*ue is presented( #he drawer is discharged+ $ut the holder can pro!e against the $ank "or the a%ount o" the che*ue( ;b<C 4 draws a che*ue at :ialkot on a Bank in Karachi( #he Bank "ails $e"ore the che*ue could $e presented in ordinary course( 4 is not discharged+ "or he has not su""ered actual da%age through any delay in presenting the che*ue( C)e:ue (a#able to order: Sec 60 ; < <here a che*ue paya$le to order purports to $e endorsed $y or on $ehal" o" the payee+ the drawee is discharged $y pay%ent in due course( ;!< <here a che*ue is originally e9pressed to $e paya$le to $earer+ the drawee is discharged $y pay%ent in due to the $earer thereo"+ notwithstanding any endorse%ent whether in "ull or in $lank appearing thereon+ and notwithstanding that any such endorse%ent purports to restrict or e9clude "urther negotiation( 7ra%ts dra'n b# one branc) o% a ban$ on anot)er (a#able to order: Sec 60+A <here any dra"t+ that is+ an order to pay %oney+ drawn $y( one o""ice o" a $ank upon another o""ice o" the sa%e $ank "or a su%+ o" %oney paya$le to order on de%and+ purports to $e endorsed $y or on $ehal" o" the payee+ the $ank is discharged $y pay%ent in due course( S(ecial (rovisions relating to c)e:ues as contained in t)e Act: Revocation o% ban$erFs aut)orit#: Sec !!+A ; < #he duty and authority o" a $anker to pay a che*ue drawn on hi% $y his custo%er are deter%ined $y;!< Counter%and o" pay%entJ ;*< Notice o" the custo%erHs deathJ ;1< Notice o" adDudication o" the custo%er as an insol!ent( C)e:ue crossed generall#: Sec !* <here a che*ue $ears across its "ace an addition o" the words Mand co%panyM or any a$$re!iation thereo"+ $etween two parallel trans!erse lines+ or o" two parallel trans!erse lines si%ply+ either with or without the words Mnot negotia$leM+ that addition shall $e dee%ed a crossing and the che*ue shall $e dee%ed to $e crossed generally( C)e:ue crossed Jaccount (a#ee: sec !*AC ; < <here a che*ue crossed generally $ears across its "ace an addition o" the word Maccount payeeM $etween the two parallel trans!erse line constituting the general crossing+ the che*ue+ $esides $eing crossed generally+ is said to $e crossedM account payeeM( ;!< <here a che*ue is crossed Maccount payeeM--;a<C ,t shall cease to $e negotia$leJ and 166 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU ;b<C ,t shall $e the duty o" the $anker collecting pay%ent o" the che*ue to credit the proceeds thereo" only to the account o" the payee na%ed in the che*ue( C)e:ue crossed s(eciall#: Sec !1C <here a che*ue $ears across its "ace an addition o" the na%e o" a $anker either+ with or without the words Mnot negotia$le+ that addition shall $e dee%ed a crossing+ and the che*ue shall $e dee%ed to $e crossed specially+ and to $e crossed to that $anker( Crossing a%ter issue: Sec !0 <here a che*ue is uncrossed+ the holder %ay cross it generally or specially( <here a che*ue is crossed generally+ the holder %ay cross specially( <here a che*ue is crossed generally or especially the holder %ay add the words Mnot negotia$leM( <here a che*ue is crossed specially+ the $anker to who% it is crossed %ay again cross it especially to another $anker+ his agent+ "or collection( <hen an uncrossed che*ue+ or a che*ue crossed generally+ is sent to a $anker "or collection he %ay cross it especially to hi%sel"( Crossing a material (art o% a c)e:ue: Sec !0+A 4 crossing authori2ed $y this 4ct is a %aterial part o" the che*ueJ it shall not $e law"ul "or any person to o$literate+ or+ e9cept as authori2ed $y this 4ct+ to add to or alter+ the crossing( /a#ment o% c)e:ue crossed generall#: Sec !. <here a che*ue is-crossed generally+ the $anker on who% it is drawn shall to pay it otherwise than to a $anker( /a#ment o% c)e:ue crossed s(eciall# <here a che*ue is crossed specially+ the $anker on who% it is drawn shall not pay it otherwise than& to the $anker to who% it is crossed+ or his agent "or collection( /a#ment o% c)e:ue crossed es(eciall# more t)an once: Sec !5C <here a che*ue is crossed specially to %ore than one $anker+ e9cept when crossed to an agent "or the purpose o" collection+ the $anker on who% it is drawn shall re"use pay%ent thereo"( /a#ment in t)e course o% crossed c)e:ue: Sec !6 <here the $anker on who% a crossed che*ue is drawn in good "aith and without negligence pays it+ i" crossed generally+ to a $anker+ and i" crossed specially+ to the $anker to who% it is crossed or his agent "or collection+ $eing a $anker+ the $anker paying the che*ue+ and 3in case such che*ue has co%e to the hands o" the payee8 the drawer thereo"+ shall respecti!ely $e entitled to the sa%e rights+ and $e placed in the sa%e position in all respects+ as they would respecti!ely $e entitled to and placed in i" the a%ount o" the che*ue had $een paid to and recei!ed $y the true owner thereo"( /a#ment o% crossed c)e:ue out o% due course: Sec !4ny $anker paying a che*ue crossed generally otherwise than to a $anker+ or a che*ue crossed specially otherwise than to the $anker 7i%%erence bet'een a c)e:ue and a bill o% eBc)ange: iC 4 che*ue is drawn on a speci"ied $anker+ $ut a $ill %ay $e drawn on any one including a $anker iiC 4 che*ue is paya$le i%%ediately on de%and+ a $ill is entitled to days o" grace( iiiC 4 che*ue re*uires no acceptance& it is intended "or i%%ediate pay%ent whereas a $ill o" e9change has to $e accepted $e"ore acceptor can $e %ade lia$le( ivC /ailure o" present%ent "or pay%ent discharges the drawer in the case o" a $ill+ $ut the drawer o" a che*ue is not discharged $y "ailure o" the holder to present it in due ti%e unless the drawer has sustained da%age $y the delay( Copyright Virtual ni!ersity o" Pakistan 167
Banking Laws and Practices-BNK 601 VU vC <hen a che*ue is not %et+ notice o" dishonor is not necessary as in the case o" $ills& want to assets in the hands o" the $anker is su""icient notice( viC 4 che*ue is re!oca$le while a $ill is not( ,n case the drawer o" the che*ue denies its e9ecution+ he %ay take a plea in the alternati!e that i" his signature on the che*ue is "ound to $e genuine it %ay $e taken that a signed che*ue had $een stolen "ro% hi% and as such he is not lia$le on it( ,n such a case it is "or the plainti"" to pro!e that the che*ue was actually drawn $y the de"endant and there"ore he was lia$le on it( Che*ues in the nature o" an order "ro% the accountNholder to the Bank directing it to pay the speci"ied a%ount out o" his account( <here signature o" the account-holder on a che*ue is "orged then it is not his order to pay( Pay%ent on the $asis o" a "oraged che*ue is thus pay%ent without authority and would not $ind the custo%er( T)e di%%erent t#(es o% negotiable instruments )ave been covered in detailN 'e s)all discuss t)e ot)er as(ects regarding t)ese instruments in coming 4essonsC
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Banking Laws and Practices-BNK 601 NEGOT?A&4E ?NSTRUMENTS Endorsement: we shall discuss endorsement and its 'inds: 'e"inition o" endorse%ent as contained in section 1B o" the 4ct is reproduced $elow&
VU LESSON 28
F<hen the %aker or holder o" a negotia$le instru%ent signs the sa%e+ otherwise than as such %aker+ "or the purpose o" negotiation+ on the $ack or "ace thereo" or on a slip o" paper anne9ed thereto+ or so signs "or the sa%e purpose a sta%ped paper intended to $e co%pleted as a negotia$le instru%ent+ he is said to indorse the sa%e+ and is called endorserG( Essentials o% an Endorsement: 4n endorse%ent %ust "ul"ill the "ollowing re*uire%ents& ,t should $e on the instru%ent( ," there is no space on it+ it %ay $e on a separate slip o" paper anne9ed to the instru%ent called KallongeE( #he endorser should sign the endorse%ent in the sa%e style and with the sa%e spellings as written in the instru%ent( :ignatures should $e in ink and not $y pencil or ru$$er sta%p( ,t should $e %ade $y the holder or the %aker( ,t cannot $e endorsed $y a stranger( #he deli!ery o" the instru%ent with the intention o" passing the property in it to the endorsee is i%portant( 4 partial endorse%ent+ i(e(+ an endorse%ent which purports to trans"er to the endorsee a part only o" the a%ount or which purports to trans"er the instru%ent to two or %ore endorsees se!erally does not operate as a negotiation o" instru%ent( 4n endorse%ent %ay $e %ade in $lank or "ull( ,t %ay also $e restricti!e( #he na%e o" a %arried wo%an should $e acco%panied $y the na%e o" her hus$and( -ere signature o" the holder+ without any words+ also constitutes endorse%ent( 4ny nu%$er o" endorse%ents %ay $e %ade on the instru%ent( No particular "or% o" words is necessary to create a contractual relationship $etween endorser and the endorsee( 4n endorse%ent $eco%es co%plete only when& #he holder signs on the "ace or $ack o" the instru%entJ #he instru%ent is deli!ered to the endorseeJ and ,t is signed and deli!ered with the intention o" !esting the endorsee with the rights o" the holder( >inds o% Endorsement: #he endorse%ents are di!ided as under& Blank or general /ull or special endorse%ent ;estricti!e endorse%ent Partial endorse%ent (he above endorsements are discussed in the following paragraphs: ?nstrument endorsed in blan$& ,t has $een discussed in section 16 which is gi!en $elow& ," the endorser signs his na%e only+ the endorse%ent is said to $e M in blan$J, and i" he adds a direction to pay the a%ount %entioned in the instru%ent to+ or to the order o"+ a speci"ied person+ the endorse%ent is said to $e Fin %ullJ, and the person so speci"ied is called the MendorseeM o" the instru%ent( ,n such type o" endorse%ent+ endorser Dust signs his na%e( Copyright Virtual ni!ersity o" Pakistan 169
VU
?nstrument endorsed in blan$: Sec 01 :u$Dect to the pro!isions hereina"ter contained as to crossed che*ues+ a negotia$le instru%ent endorsed in $lank is paya$le to the $earer thereo" e!en although originally paya$le to order( "ull or s(ecial endorsement& #he said endorse%ent has $een de"ined in section 16 which is gi!en $elow& ," the endorser signs his na%e only+ the endorse%ent is said to $e M in blan$J, and i" he adds a direction to pay the a%ount %entioned in the instru%ent to+ or to the order o"+ a speci"ied person+ the endorse%ent is said to $e Fin %ullJ, and the person so speci"ied is called the MendorseeM o" the instru%ent( Conversion o% endorsement in blan$ into endorsement in %ull: Sec 00 ," a negotia$le instru%ent+ a"ter ha!ing $een endorsed in $lank+ i" endorsed in "ull+ the a%ount o" it cannot $e clai%ed "ro% the endorser in "ull+ e9cept $y the person to who% it has $een endorsed in "ull+H or $y one who deri!es title through such person( Endorser %entions the na%e o" endorsee and puts his signature( JEndorseeJ #he pro!isions o" this 4ct relating to a payee shall apply with the necessary %odi"ications to an endorsee( Restrictive Endorsement: ,t has $een de"ined in section B03@8 o" the 4ct which is reproduced $elow& 4n endorse%ent is restricti!e which either-;estricts or e9cludes the right to "urther negotiate the instru%ent+ or Constitutes the endorsee an agent o" the endorser to endorse the instru%ent or to recei!e its contents "or the endorser or "or so%e other speci"ied person :uch endorse%ent restricts "urther negotiation o" the instru%ents+ "or e9a%ple /a# =asir onl# Signature o% endorser 2it)out Recourse Endorsement ,t has $een de"ined in section B@ o" the 4ct which is reproduced $elow& #he endorser o" a negotia$le instru%ent %ay+ $y e9press words in the endorse%ent+ e9clude his own lia$ility thereon+ or %ake such lia$ility or the right o" the endorsee to recei!e the a%ount due thereon depend upon the happening o" a speci"ied e!ent+ although such e!ent %ay ne!er happen( <here an endorser so e9cludes his lia$ility and a"terwards $eco%es the holder o" the instru%ent+ all inter%ediate endorsers are lia$le to hi%( <here the right o" an endorsee to recei!e the a%ount due on the negotia$le instru%ent is %ade dependent in the a"oresaid %anner the condition is !alid only as $etween the endorser and the endorsee( <here the endorse%ent o" a negotia$le instru%ent purports to $e conditional+ the payer %ay disregard the condition and pay%ent (o the endorsee is !alid whether the condition has $een "ul"illed or not( <ithout responsi$ility o" the endorser( /or e9a%ple& /a# =asir 'it)out recourse to me Signature o% endorser /artial Endorsement: 170 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 ,t has $een de"ined in section B6 o" the 4ct which is reproduced $elow&
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Negotiation $y endorse%ent %ust $e o" the entire instru%ent( 4n endorse%ent which purports to trans"er to the endorsee only a part o" the a%ount paya$le+ or which purports to trans"er the instru%ent to two or %ore endorsees se!erally+ is not !alid as a negotia$le o" the instru%entJ $ut where such a%ount has $een paid in part+ a note to that e""ect %ay $e endorsed on the instru%ent+ which %ay then $e endorsed "or the $alance( #he endorser directs the trans"er only a part o" a%ount paya$le on a $ill o" e9change or pro%issory note through such endorse%ent( EB(lanation: 4 partial endorse%ent+ i(e(+ an endorse%ent which purports to trans"er to the indorse a part only o" the a%ount paya$le+ does not operate as a negotiation o" the instru%ent( :uch an endorse%ent is not warranted $y the custo% o" %erchants and would $e attended with this incon!enience to the prior parties+ that it would su$Dect the% to a plurality o" actions( ,n the sa%e %anner+ an endorse%ent+ which purports to trans"er the instru%ent to two or %ore indorses se!erally and not Dointly+ is also e9pressly "or$idden $y this section( #he o$Dect o" the section is to pre!ent an instru%ent $eing trans"erred "or a portion only o" the su% at the ti%e due under it+ $ecause a personal contract cannot $e apportioned( #he endorse%ent %ust $e the endorse%ent o" the instru%ent( ,llustrations& 4 is the holder o" a $ill "or ;s( 1+000( 4 indorses it thus& Fpay ;s B0 to trans"erred to B and C as each o" the% is in indorse o" only a part o" the a%ount+ the endorse%ent is partial and in!alid "or the purpose o" negotiation( 4 is the holder o" a $ill "or ;s( 1+000( 4 indorses it thus& Fpay B or order ;s( B00( #his is a partial endorse%ent and in!alid "or the purpose o" negotiation( #he last part o" the section says that i" a $ill has $een paid in part+ the "act o" the part pay%ent %ay $e indorsed on the instru%ent+ and it %ay then $e negotiated "or the residue+ e(g((+ a $ill %ay $e indorsed thus& FPay 4 or order ;s( B00 $eing the unpaid residue o" the $illG( :uch an endorse%ent would $e !alid( E%%ect o% endorsement: Sec 08 :u$Dect to the pro!isions o" this 4ct relating to restricti!e+ conditional and *uali"ied endorse%ent+ the endorse%ent o" a negotia$le in "ollowed $y deli!ery trans"ers to the endorsee the property thereinH with the right o" "urther negotiation( 4n endorse%ent is restricti!e which either-;estricts or e9cludes the right to "urther negotiate the instru%ent+ or Constitutes the endorsee an agent o" the endorser to endorse the instru%ent or to recei!e its contents "or the endorser or "or so%e other speci"ied person( Pro!ided that the %ere a$sence o" words i%plying+ right to negotiate does not %ake the endorse%ent restricti!e( ?llustrations B signs the "ollowing endorse%ents on di""erent negotia$le instru%ents paya$le to $earer----MPay the contents to C only(M MPay C "or any use(M MPay C or order "or the account o" B(M M#he within Dust $e credited to C(M Copyright Virtual ni!ersity o" Pakistan 171
Banking Laws and Practices-BNK 601 VU #hese endorse%ents e9clude the right o" "urther negotiation $y C( MPay C(M MPay C !alue in account with the =riental Bank(M MPay the contents to C+ $eing part o" the consideration in a certain deed o" assign%ent e9ecuted $y C to the endorser and others( #hese endorse%ents do not e9clude the right o" "urther negotiation $y C( 2)o ma# negotiate: Sec 0 )!ery sole-%aker+ drawer+ payee or endorsee+ or all o" se!eral Doint %akers+ drawers+ payees or endorsees+ o" a negotia$le instru%ent %ay+ i" the negotia$ility o" such instru%ent has not $een restricted or e9cluded as %entioned in :ection B0+ endorse and negotiate the sa%e( )9planation --- Nothing in this section ena$les a %aker or drawer to endorse or negotia$le an instru%ent+ unless he is in law"ul possession or is holder thereo" or ena$les a payee or endorsee to endorse or negotiate an instru%ent+ unless he is holder thereo"( ?llustration 4 $ill is drawn paya$le to 4 or order+ 4 endorses it to B+ the endorse%ent not containing the words Mor orderM or any e*ui!alent words( B %ay negotiate the instru%ent( ( Re:uisites o% endorsement: Sec 0. Negotiation $y endorse%ent %ust $e o" the entire instru%ent( 4n endorse%ent which purports to trans"er to the endorsee only a part o" the a%ount paya$le+ or which purports to trans"er the instru%ent to two or %ore endorsees se!erally+ is not !alid as a negotia$le o" the instru%entJ $ut where such a%ount has $een paid in part+ a note to that e""ect %ay $e endorsed on the instru%ent+ which %ay then $e endorsed "or the $alance( 4egal re(resentative cannot b# deliver# onl# negotiate instrument endorsed b# deceased: Sec 05 #he legal representati!e o" a deceased person cannot negotiate $y deli!ery only a pro%issory note+ $ill o" e9change or che*ue paya$le to order and endorsed $y the deceased $ut not deli!ered( Maturit# o% t)e ?nstruments 2)at is Maturit#: ,t is the date o" a pro%issory note or $ill o" e9change+ at which it "alls due( 3:ection @@ de"ines the %aturity8 7a#s o% Grace: #hree days o" grace are pro!ided in section @@ "or deter%ining pay a$ility o" instru%ent $ut said days o" grace are not a!aila$le when instru%ent is paya$le on de%and or at sight or on present%ent 'ays o" >race are applica$le in case o" Pro%issory note and $ill o" e9change $ut not che*ue+ since it is always paya$le on de%and(
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VU LESSON 29
/ART?ES TO /ROM?SSOR= NOTES, &?44S AN7 CAEQUES <e ha!e already discussed the parties to pro%issory note+ $ill o" e9change and che*ue+ Various legal aspects with respect to the parties to these instru%ents are discussed in detail in the "ollowing paragraphs& )!ery person capa$le o" contracting can $e a party to a negotia$le instru%ent that is can $e a party $y %aking. drawing+ accepting+ endorsing a negotia$le instru%ent( Ca(acit# to ma$e9dra' negotiable instruments: ,t has $een de"ined in section @6 o" the 4ct which is reproduced $elow& Ever# (erson ca(able o% contracting+ according to the law to which he is su$Dect+ %ay $ind hi%sel" and $e $ound $y the %aking+ drawing+ acceptance+ endorse%ent+ deli!ery and negotiation o" a pro%issory note+ $ill o" e9change or che*ue( /ositions o% (arties ')o are incom(etent to enter into contracts: -inor& <here such an instru%ent is %ade+ drawn or negotiated $y a %inor+ the %aking+ drawing or negotiating entitles the holder to recei!e pay%ent o" such instru%ent and to en"orce it against any party thereto other than %inor( 4lthough the %inor cannot $ind hi%sel" $y %aking. drawing a negotia$le instru%ent $ut through such an instru%ent $ind all other parties( 4 person o" unsound %ind is inco%petent to enter into a contract ,nsol!ent: #he property $elonging to an insol!ent !ests in an o""icial recei!er+ hence the insol!ent person cannot neither sue nor capa$le o" negotiating. trans"er. endorse the instru%ent Lunatic- Position sa%e as that o" %inor Agent 9Agenc#: ,t has $een de"ined in section @6 o" the 4ct which is reproduced $elow& )!ery person capa$le o" $inding hi%sel" or o" $eing $ound $y the %aking+ drawing+ acceptance or negotiation o" a negotia$le instru%ent+ %ay so $ind hi% or $e $ound $y a duly authori2ed agent acting in his na%e( 4 general authority to transact $usiness and to recei!e and discharge de$ts does not con"er upon an agent the power o" accepting or indorsing $ills o" e9change so as to $ind his principal( 4n authority to draw $ills o" e9change does not o" itsel" i%port an authority to endorse( 4iabilit# o% t)e Agent& 4n agent %ay draw+ accept or negotiate an instru%ent on $ehal" o" the principal so as to $ind hi%( 1owe!er this $inding is su$Dect to "ollowing conditions& #hat the agent has $een authori2ed $y the principal to that e""ect& #hat the authority has $een e9pressed in clear ter%s& #hat the principal is a co%petent person to enter into a contract( #hat the agent acts in the na%e o" the principal& and #hat the agent has not e9ceeded his authority( #he agent will $e personally lia$le in any o" the "ollowing casesJ ," he does not disclose the na%e o" his principal& Copyright Virtual ni!ersity o" Pakistan 173
Banking Laws and Practices-BNK 601 ," he does not indicate that he is an agent( ," he e9ecutes an instru%ent without or in e9cess o" his authority( #he a$o!e pro!isions are contained in section !6 which is reproduced&
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<here a person signs a pro%issory note+ o" e9change or che*ue without adding to his signature words indicating that he signs it as an agent "or and on $ehal" o" a principal or in a representati!e character+ he is personally lia$le thereon $ut the %ere addition to his signature o" words descri$ing hi% as an agent or as "illing a representati!e character does not e9e%pt hi% "ro% personal lia$ility( Notwithstanding anything contained in su$-section 318+ any person signing a pro%issory note+ $ill o" e9change or che*ue "or and on $ehal" o" the principal is not lia$le to a person who induces hi% to sign upon the $elie" that the principal alone would $e held lia$le( /arties to /romissor# Note: #hese are discussed $elow& Ma$er: #he person who %akes the note and undertakes to pay the a%ount stated in the pro%issory note( /a#ee: #he person to who% the a%ount is paya$le under pro%issory note( Aolder: #he person who %ay $e the payee or endorsee o" the pro%issory note( 1older is the person who is entitled to the possession o" the instru%ent in his own na%e and also entitled to recei!e the a%ount due under a pro%issory note( Endorser #he person who $y endorse%ent trans"ers the pro%issory note to another person( )ndorsee #he person to who% the pro%issory note is trans"erred $y endorse%ent( /arties to bill o% eBc)ange #hese are discussed $elow& 7ra'er #he %aker o" a $ill o" e9change is 'rawer( 7ra'ee #he person who is directed $y the drawer to pay the a%ount stated in $ill o" e9change is called drawee( Acce(ter #he drawee when accepts the bill o% eBc)ange+ he $eco%es acceptor( /a#ee #he person to who% or to whose order the a%ount stated in $ill o" e9change is to $e paid( Aolder )9plained while discussing pro%issory note( Endorser )9plained while discussing pro%issory note( Endorsee 174 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 )9plained while discussing pro%issory note( /arties to a C)e:ue: #hese are discussed $elow& 7ra'er #he person who draws. writes a che*ue is called the drawer
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7ra'ee #he person who is directed through a che*ue to pay the speci"ied a%ount is called the drawee+ howe!er in case o" a che*ue+ drawee %ust always $e a $ank( /a#ee )9plained while discussing pro%issory note( Aolder )9plained while discussing pro%issory note( Endorser )9plained while discussing pro%issory note( Endorsee )9plained while discussing pro%issory note( Aolder: #he scope o" the holder is contained in section C o" the negotia$le instru%ent 1CC1 which is reproduced $elow& #he MholderM o" a pro%issory note+ $ill o" e9change or che*ue %eans the payee or endorsee that is in possession o" it or the $earer thereo" $ut does not include a $ene"icial owner clai%ing through a $ena%idar( Sec 6 ,n order to $e called a K1olderE+ the person %ust satis"y the "ollowing two conditions& 1e %ust $e entitled to the possession o" the instru%ent in his own na%e 1e %ust $e entitled to recei!e or reco!er the a%ount due thereon "ro% the parties lia$le thereto Aolder in 7ue Course: 1older in due courser has $een e9plained in section 5 o" the 4ct+ which is reproduced $elow& M1older in due courseM %eans any person who "or consideration $eco%es the possessor o" a pro%issory note+ $ill o" e9change or che*ue i" paya$le to $earer+ or the payee or endorsee thereo"+ i" paya$le to order+ $e"ore it $eca%e o!erdue+ without notice that the title o" the person "ro% who% he deri!ed his own title was de"ecti!e( Conditions %or a (erson to be called OAolder in 7ue Course3: 1e %ust $e holder 1e o$tains the instru%ent "or !alua$le consideration 1e %ust $eco%e the holder o" the instru%ent $e"ore %aturity 1e %ust ha!e o$tained the instru%ent in good "aith 1e %ust take the instru%ent co%plete and regular on the "ace o" it( Acce(tor3s liabilit# to t)e Aolder in 7ue Course ')en endorsement %orged: Sec 1 4n acceptor o" a $ill o" e9change already endorsed is not relie!ed "ro% lia$ility $y reason that such endorse%ent is "orged+ i" he knew or had reason to $elie!e the endorse%ent to $e "orged when he accepted the $ill(
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Banking Laws and Practices-BNK 601 VU /rivileges o% a )older in due course ,n case o" ,nchoate sta%ped instru%ents& 4n inchoate sta%ped instru%ent can $e co%pleted $y the trans"eree. holder in due course and his right is not a""ected that the instru%ent was not $earing the re*uired sta%ps at the ti%e he ac*uired the instru%ent( /rior (arties liable to )older in due course: ,t has $een de"ined in section ?6 which is gi!en $elow& )!ery prior party to a negotia$le instru%ent is lia$le thereon to a holder in due course until the instru%ent is duly satis"ied No e%%ect o% conditional deliver#: ,t has $een de"ined in section 76 which is gi!en $elow& #he %aking+ acceptance or endorse%ent o" pro%issory note+ $ill o" e9change or che*ue is co%pleted $y deli!ery+ actual or constructi!e( 1older in due Course ac*uires $etter title than that o" the trans"eror& -- 1e ac*uires a $etter title to the instru%ent despite o" the "act that there %ay $e de"ect in the title o" the trans"eror( 7istinguis)ing "eatures bet'een Aolder and Aolder in due Course Aolder #itle o" the holder shall not $e good i" the title o" any prior parties is de"ecti!eC Aolder in 7ue Course 1older in due course shall ha!e a good title e!en i" the title o" prior parties is de"ecti!e( 1owe!er condition is that he should o$tain that title in good "aith(
Consideration is not necessary to $e a holder Consideration is necessary o" an instru%ent 4 holder does not enDoy any special )nDoys special pri!ilegesC pri!ileges
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4 holder is a person who is entitled in his own na%e to the possession o" the instru%ent and to reco!er or recei!e the a%ount due thereon "ro% the parties(
1e is a person who has taken the instru%ent in good "aith and "or !alue+ and also $e"ore its %aturityC
4iabilities o% t)e (arties to an instrument: <e shall discuss the lia$ilities o" the "ollowing parties in the light o" rele!ant legal pro!isions& Lia$ility o" 7ra'er Lia$ility o" 7ra'ee o" a che*ue Lia$ility o" ma$er o" note and acce(tor o" $ill Lia$ility o" Endorser 4iabilit# o% 7ra'er: ,t has $een de"ined in section ?0 which is gi!en $elow& #he drawer o" a $ill or che*ue is $ound to co%pensate the holder in case dishonored $y the drawee or acceptor pro!ided due notice o" dishonor has $een gi!en or recei!ed $y the drawer( Be"ore acceptance o" a $ill+ drawerEs lia$ility is pri%ary and a"ter acceptance his lia$ility $eco%es secondary to acceptorEs lia$ility( 4iabilit# o% dra'ee o% c)e:ue: ,t has $een de"ined in section ?1 which is gi!en $elow& #he drawee o" a che*ue ha!ing su""icient "unds o" the drawer in his hands properly applica$le to the pay%ent o" such che*ue %ust pay the che*ue when duly re*uired so to do+ and+ in de"ault o" such pay%ent+ %ust co%pensate the drawer "or any loss or da%age caused $y such de"ault 4iabilit# o% ma$er o% note and acce(tor o% bill: ,t has $een de"ined in section ?@ which is gi!en $elow& ,n the a$sence o" a contract to the contrary+ the %aker o" a pro%issory note+ $y %aking it+ the acceptor $e"ore %aturity o" a $ill o" e9change $y accepting it+ engages that he will pay it according to the tenor o" the note or his acceptance respecti!ely+ and in de"ault o" such pay%ent+ such %aker or acceptor is $ound to co%pensate any party to the note or $ill "or any loss or da%age sustained $y hi% and caused $y such de"ault( ( T)e acce(tor o% a bill o% eBc)ange at or a%ter maturit#+ $y accepting it+ engages to (a# the a%ount thereo" to the )older on demandC Copyright Virtual ni!ersity o" Pakistan 177
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4iabilit# o% endorser: ,t has $een de"ined in section ?B which is gi!en $elow& ,n the a$sence o" a contract to the contrary+ the (endorser o" a negotia$le instru%ent+ $y indorsing it+ engages that on due present%ent it shall $e accepted and paid according to its tenor and that i" it $e dishonored he will co%pensate the holder or su$se*uent endorser who is co%pelled to pay it "or any loss or da%age caused to hi% $y such dishonor( EBtent o% 4iabilit#++ Rules as to com(ensation: ,t has $een de"ined in section 116 which is gi!en $elow& #he co%pensation paya$le in case o" dishonor o" a pro%issory+ $ill o" e9change or che*ue+ $y any party lia$le to the holder or any endorsee+ shall $e deter%ined $y the "ollowing rules&+#he holder is entitled to the a%ount due upon the instru%entJ together with the e9penses properly incurred in presenting+ noting and protesting itJ
<hen the person charged resides at a place di""erent "ro% that at which the instru%ent was paya$le+ the holder is entitled to recei!e such su% at the current rate o" e9change $etween the two placesJ 4n endorser who+ $eing lia$le+ has paid the a%ount due on the sa%e is entitled to the a%ount so paid with interest at si9 per centu% per annu% "ro% the date o" pay%ent until+ tender or reali2ation thereo"+ together with all e9penses caused $y the dishonor <hen the person charged and such endorser reside at di""erent places the endorser is entitled to recei!e such su% at the current rate o" e9change $etween the two placesJ #he party entitled to co%pensation %ay draw a $ill upon the party lia$le to co%pensate hi%+ paya$le at sight or on de%and+ "or the a%ount due to hi%+ together with all e9penses properly incurred $y hi%( :uch $ill %ust $e acco%panied $y the instru%ent dishonored and the protest thereo" 3i" any8( ," such $ill is dishonored+ the party dishonoring the sa%e is lia$le to %ake co%pensation thereo" in the sa%e %anner as in the case o" the original $ill( )egotiation of the instruments Negotiation: ,n general ter%s+ negotiation is the characteristic o" trans"era$ility possessed $y a negotia$le instru%ent( ,t has $een de"ined in section ?6 which is gi!en $elow& <hen a pro%issory note+ $ill o" e9change or che*ue is trans"erred to any person+ so as to constitute that person the holder thereo"+ the instru%ent is said to $e negotiated( #his trans"er $y way o" negotiation can take place in the "ollowing ways& Negotiation $y deli!ery Negotiation $y endorse%ent and deli!ery )egotiation of the instruments Negotiation b# deliver#: ,t has $een de"ined in section 76 which is gi!en $elow& 178 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU :u$Dect to the pro!isions o" section BC+ a pro%issory note+ $ill o" e9change or che*ue paya$le to $earer is negotia$le $y deli!ery thereo"( )9ception( ---4 pro%issory note $ill o" e9change or che*ue deli!ered on condition that it is not to take e""ect e9cept in a certain e!ent is not negotia$le 3e9cept in the hands o" a holder "or !alue without notice o" the condition8 unless such e!ent happens( ?llustration: -r( 4sla% is the payee o" a $earer che*ue a%ounting ;s B0+000 and this che*ue "ul"ills all essential re*uire%ents( -r( 4sla% deli!ers this che*ue to -r( Iasir( #his che*ue has $een negotiated. trans"erred to -r( Iasir $y way o" deli!ery( Negotiation b# Endorsement and 7eliver#: ,t has $een de"ined in section 7C which is gi!en $elow& :u$Dect to the pro!isions o" section BC a pro%issory note+ $ill o" e9change or che*ue paya$le to order is negotia$le $y the holder $y endorse%ent and deli!ery thereo"( :ection BC is regarding de"ecti!e title( 2)o ma# negotiate t)e instruments -aker. 'rawer Payee )ndorsee #his is pro!ided in Section 0 o" the 4ct( )!ery sole-%aker+ drawer+ payee or endorsee+ or all o" se!eral Doint %akers+ drawers+ payees or endorsees+ o" a negotia$le instru%ent %ay+ i" the negotia$ility o" such instru%ent has not $een restricted or e9cluded as %entioned in :ection B0+ endorse and negotiate the sa%e( Rig)t o% t)e )older o% t)e instrument ac:uired a%ter dis)onor or ')en overdue: ,t has $een de"ined in section B5 which is gi!en $elow& #he holder o" negotia$le instru%ent who has ac*uired it a"ter dishonor+ whether $y non-acceptance or non-pay%ent+ with notice thereo"+ or a"ter %aturity+ has only+ as against the other parties+ the rights thereon o" his trans"eror and is su$Dect to the e*uities to which the trans"eror was su$Dect at the ti%e o" ac*uisition $y such holder( E%%ect o% 7e%ective Title: ,t has $een de"ined in section BC which is gi!en $elow& <hen a pro%issory note+ $ill o" e9change or che*ue has $een lost or has $een o$tained "ro% any %aker+ drawer+ acceptor or holder thereo" $y %eans o" an o""ence or "raud+ or "or an unlaw"ul consideration+ neither the person who "inds or so o$tains the instru%ent nor any possessor or endorsee who clai%s through such person is entitled to recei!e the a%ount due thereon "ro% such %aker+ drawer+ acceptor or holder+ unless such possessor or endorsee is+ or so%e person through who% he clai%s was+ a holder thereo" in due course( ?nstrument negotiable till (a#ment or satis%action Sec .8 ,t has $een de"ined in section 60 which is gi!en $elow&
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Banking Laws and Practices-BNK 601 VU 4 negotia$le instru%ent %ay $e negotiated 3e9cept $y the %aker+ drawer or acceptor a"ter %aturity8 until pay%ent or satis"action thereo" $y the %aker+ drawee or acceptor at or a"ter %aturity+ $ut not a"ter such pay%ent or satis"action( /resentment o% Negotiable ?nstrument /resentment %or Acce(tance: ,t has $een de"ined in section 61 which is gi!en $elow& 4 $ill o" e9change paya$le a"ter sight %ust+ i" no ti%e or place is speci"ied therein "or present%ent+ $e presented to the drawee thereo" "or acceptance+ i" he can+ a"ter reasona$le search+ $e "ound+ $y a person entitled to de%and at within a reasona$le ti%e a"ter it is drawn and in $usiness hours on a $usiness day( ,n de"ault o" such present%ent+ no party thereto is lia$le thereon to the person %aking such de"ault Essentials o% Valid Acce(tance -ust $e in writing :igned $y drawee or his agent 4cceptance %ust appear on the $ill 4ccepted $ill %ust $e deli!ered to the holder 2)o can acce(t t)e &ill 'rawee or his agent+ in case o" se!eral drawees+ all the drawees can accept ,n case o" death o" the drawee+ $ill can $e accepted $y the legal representati!e o" the deceased drawee =""icial recei!er+ in case drawee declared as insol!ent /resentment %or Sig)t: ,t has $een de"ined in section 6@ which is gi!en $elow& 4 pro%issory note paya$le at a certain period a"ter sight+ %ust $e presented to the %aker thereo" "or sight 3i" he can a"ter reasona$le search $e "ound8 $y a person entitled to de%and pay%ent+ within a reasona$le ti%e a"ter it is %ade and in $usiness hours on a $usiness day( ,n de"ault o" such present%ent+ no party thereto is lia$le thereon to Hthe person %aking such de"ault( /resentment %or /a#ment: ,t has $een de"ined in section 67 which is gi!en $elow& :u$Dect to the pro!isions o" section 66+ pro%issory notes+ $ills o" e9change and che*ues %ust $e presented "or pay%ent to the %aker+ acceptor or drawee thereo" respecti!ely+ $y or on $ehal" o" the holder as hereina"ter pro!ided( ,n de"ault o" such present%ent+ the other parties thereto are not lia$le thereon to such holder( :ection 66 underlines situations when present%ent is unnecessary e(g( 'rawee pre!ents present%ent( Payment and nterest To ')om (a#ment could be made: ,t has $een de"ined in section 6C which is gi!en $elow& :u$Dect to the+ pro!isions o" section C@+ pay%ent o" the a%ount due on a pro%issory note+ $ill o" e9change or che*ue %ust+ in order to discharge the %aker or acceptor+ $e %ade to t)e )older o" the instru%ent( :ection C@ underlines the situations when %aker+ drawer+ acceptor o" an instru%ent are discharged "ro% lia$ility( 180 Copyright Virtual ni!ersity o" Pakistan
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?nterest ')en rate s(eci%ied or not s(eci%ied: ,t has $een de"ined in section 65 which is gi!en $elow& :u$Dect to the pro!ision o" any law "or the ti%e $eing in "orce relating to the relie" o" de$tors+ and without preDudice to the pro!isions o" section ?7 o" the Code o" Ci!il Procedure+ 150C+--when interest at a speci"ied rate is e9pressly %ade paya$le on a pro%issory note or $ill o" e9change and no date is "i9ed "ro% which interest is to $e paid+ interest shall $e calculated at the rate speci"ied+ on the a%ount o" the principal %oney due thereon+ "ro% the date o" the note+ or+ in the case o" a $ill+ "ro% the date on which the a%ount $eco%es paya$le+ until tender or reali2ation o" such a%ount+ or until the date o" the institution o" a suit to reco!er such a%ountJ where a pro%issory note or $ill o" e9change is silent as+ regards interest or does not speci"y the rate o" interest+ interest on the a%ount o" the principal %oney due+ thereon shall+ notwithstanding any collateral agree%ent relating to interest $etween any parties to the instru%ent+ $e allowed and calculated at the rate o" si9 per centu% per annu% "ro% the date o" the note+ or+ in the case o" a $ill+ "ro% the date on which the a%ount $eco%es paya$le+ a%ount due thereon+ or until the date o" the institution o" a suit to reco!er such a%ount( ?nterest ')en no rate s(eci%ied: ,t has $een de"ined in section C0 which is gi!en $elow& <hen no rate o" interest is speci"ied in the instru%ent+ interest on the a%ount due thereon shall+ notwithstanding any agree%ent relating to interest $etween any parties to the instru%ent+ $e calculated at the rate o" si9 per centu% per annu%+ "ro% the date at which the sa%e ought to( ha!e $een paid $y the party charged+ until tender or reali2ation o" the a%ount due thereon+ or until such date a"ter the institution o" a suit to reco!er such a%ount as the Court directs( *ischarge from liability :ection C@ contains the pro!isions with regard to discharge o" a party "ro% its lia$ility under a negotia$le instru%ent( #he said pro!isions are appended $elow& #he %aker+ acceptor or endorser respecti!ely o" a negotia$le instru%ent is discharged "ro% lia$ility thereon---&# cancellationJ to a holder thereo" who cancels such acceptorHs or endorserHs na%e with intent to discharge hi%+ and to all parties clai%ing under such holderJ &# releaseJ to a holder thereo" who otherwise discharges such %aker+ acceptor or endorser+ and to all parties deri!ing title under such holder a"ter notice o" such dischargeJ and &# (a#mentN to all parties thereto+ i" the instru%ent is paya$le to $earer+ or has $een endorsed in $lank+ and such %aker+ acceptor or endorser %akes pay%ent in due course o" the a%ount due thereon(
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Banking Laws and Practices-BNK 601 /R?NC?/4ES AN7 "ORMS O" 4EN7?NG
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&an$ing Credit Management #he $asic purpose o" a $anking $usiness like any other $usiness re%ains %a9i%i2ation o" pro"its( #his is achie!ed $y charging higher rates o" pro"its. interest on their in!est%ents. "inancing and paying lower rate o" interest to their depositors. creditors( #his process in $anking ter%inology is called K s(read3C :ince loans are the do%inant asset in a co%%ercial $ank so it is i%portant to pay greater attention to its %anage%ent( Co%%ercial $anks e9tend credit to di""erent types o" $orrowers "or di""erent purposes( /or %ost custo%ers+ $ank credit is the pri%ary source o" a!aila$le de$t "inancing( /or $anks good loans are the %ost pro"ita$le assets( 4s with any in!est%ent+ e9tending loans to the $usinesses and indi!iduals in!ol!es taking risk and to earn high returns( ;eturns co%es in the "or% o" pro"its. interest+ "ee inco%e and in!est%ent inco%e "ro% due deposits( Banks also use loans to cross sell other "ee-generating ser!ices( 4s such the %ost pro%inent assu%ed risk is credit risk( -any "actors can lead to loan de"aults( 4n entire industry+ such as energy+ agriculture+ or real estate+ can decline $ecause o" general econo%ic e!ents( /ir%-speci"ic pro$le% %ay arise "ro% changing technology+ strikes+ and shi"ts in consu%er pre"erences or $ad %anage%ent( ,ndi!idual $orrowers "ind that the a$ility to repay closely "ollows the $usiness cycle as personal inco%e rises and "alls( Loans as a group thus e9hi$it the highest charge o""s a%ong $ank assets+ so $anks regularly set aside su$stantial results against anticipated losses( ,nterest rate risk also rises "ro% credit decisions( Loan %aturities+ pricing+ and the "or% o" principal repay%ent a""ect the ti%ing and %agnitude o" $anks cash in"lows( /loating-rate and !aria$le-rate loans+ "or e9a%ple+ generate cash "lows that !ery closely with !aria$le $orrowing cost( Loans are the do%inant assets in %ost $anksE port"olios+ representing on a!erage B0Y to 6BY o" total assets( Loan co%positions !ary greatly a%ong $anks depending on si2e+ location+ trade area+ and lending e9pertise( Various concentrations in lending acti!ities carry di""erent risk and return( Pro$le% loans and loan losses also !ary with the $usiness cycle( Credit 7e%ined Credit has $een de"ined as the per%ission to use anotherEs capital( #he power to o$tain goods or ser!ices $y gi!ing a pro%ise to pay a certain su% o" %oney at a speci"ied date in the "uture( Credit is a present ;ight to "uture Pay%ent( Stages in ris$ management (rocess ,denti"ication o" inherent risks( 3risk acceptance8 'e!eloping solution to %itigate the identi"ied risk ,denti"ying opportunities 3 returns8 4!oiding losses( Managing ris$ anot)er a((roac) 4!oid risk 'i!ersi"y . spread risk a%ong !arious assets Control ad!erse e!ents :hare risk with an other party such as insurance #rans"er risk such as outsourcing 4ccept the risk &ene%its o% Ris$ Management& )""ecti!e strategic planning Better cost control 3 $udgeting8 )nhancing share holder !alues Creating a $est practice and *uality organi2ation 182 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 Protecting the organi2ation
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&an$ing environment Banking en!iron%ent is !ery co%petiti!e( #here is neck to neck co%petition a%ong $anks and with other "inancial institutions( Banks are re*uired to %anage $otto% line $etween deposit rates and lending rates that is risk- adDusted rate o" interest "or $orrowers and co%petiti!e interest rate "or depositors( Managing Ris$ and returns: #he "unda%ental o$Decti!e o" $ank %anage%ent is to %a9i%i2e shareholdersE wealth( #his goal is interpreted to %ean %a9i%i2ing the %arket !alue o" a "ir%Es co%%on stock( <ealth %a9i%i2ation+ in turn+ re*uires that %anagers e!aluate the present !alue o" cash "lows under uncertainty with larger+ nearter% cash "lows pre"erred when e!aluated on a risk-adDusted $asis( #o o$tain higher yields+ a $ank %ust either take on increased risk or lower operating costs( >reater risk %ani"ests itsel" in greater !olatility o" net inco%e and %arket !alue o" stockholdersE e*uity( <ealth %a9i%i2ation re*uires the %anager to e!aluate and $alance the trade-o""s $etween the opportunity "or higher returns+ the pro$a$ility o" not reali2ing those returns+ and the possi$ility that the $ank %ight "ail( 4 $ankEs pro"ita$ility will generally !ary directly with the riskiness o" its port"olio and operations( 4lthough so%e risks can $e sought out or a!oided+ others are inherent in the pre!ailing econo%ic en!iron%ent and speci"ic %arkets ser!ed( Banks in agriculture or energy-related areas+ "or e9a%ple+ lend to $usinesses in!ol!ed in cyclical industries( )!en though %anage%ent can control the credit e!aluation procedure+ returns to the $ank !ary with returns to its custo%ers+ and these returns are hea!ily dependent on local econo%ic conditions( Ris$ management is the process $y which %anagers identi"y+ assess+ %onitor+ and control risks associated with a "inancial institutionEs acti!ities( #he co%ple9ity and range o" "inancial products ha!e %ade risk %anage%ent %ore di""icult to acco%plish and e!aluate( ,n larger "inancial institutions+ risk %anage%ent is used to identi"y all risks associated with particular $usiness acti!ities and to aggregate in"or%ation such that e9posures can $e e!aluated on a co%%on $asis( 4s "or%al process ena$les these institutions to %anage risks on $oth a transactions $asis and $y port"olio in light o" the institutionEs e9posures in a glo$al strategic en!iron%ent( #here are "our types o" risks which are as "ollow& C Credit risk !C Li*uidity risk *C -arket risk 1C =perational risk Credit Ris$: Credit risk is associated with the *uality o" indi!idual assets and the likelihood o" de"ault( ,t is e9tre%ely di""icult to assess indi!idual asset *uality $ecause li%ited pu$lished in"or%ation is a!aila$le( ,n "act+ %any $anks that $uy $anks are surprised at the ac*uired $ankEs poor asset *uality+ e!en though they conducted a due diligence re!iew o" the ac*uired $ank prior to the purchase( <hene!er a $ank ac*uires an earning asset+ it assu%es the risk that the $orrower will de"ault+ that is+ not repay the principal and interest on a ti%ely $asis( Credit risk is the potential !ariation in net inco%e and %arket !alue o" e*uity resulting "ro% this nonpay%ent or delayed pay%ent( 'i""erent types o" assets and o""-$alance sheet acti!ities ha!e di""erent de"ault pro$a$ilities( Loans typically e9hi$it the greatest credit risk( Changes in general econo%ic conditions and a "ir%Es operating en!iron%ent alter the cash "low a!aila$le "or de$t ser!ice( #hese conditions are di""icult to predict( :i%ilarly+ an indi!idualEs a$ility to repay de$ts !aries with changes in e%ploy%ent and personal net worth( /or this reason+ $anks per"or% a credit analysis on each loan re*uest to assess a $orrowerEs capacity to repay( n"ortunately+ loans tend to deteriorate long $e"ore accounting in"or%ation re!eals any pro$le%s( ,n addition+ %any $anks enter into o""-$alance sheet acti!ities+ such as loan co%%it%ents+ guaranty o""ers+ and deri!ati!e contract( #he prospecti!e $orrowers and counterparties %ust per"or% or the $ank %ay take a loss( #hese risks can $e su$stantial+ $ut are di""icult to %easure "ro% pu$lished data( 4i:uidit# Ris$ Copyright Virtual ni!ersity o" Pakistan 183
Banking Laws and Practices-BNK 601 VU Li*uidity risk is the current and potential risk to earnings and the %arket !alue o" stockholdersE e*uity that results "ro% a $ankEs ina$ility to %eet pay%ent or clearing o$ligations in a ti%ely and cost-e""ecti!e %anner( Li*uidity risk is greatest when a $ank cannot anticipate new loan de%and or deposit withdrawals+ and does not ha!e access to new sources o" cash( #his risk can $e the result o" either "unding pro$le%s or %arket li*uidity risk( /unding li*uidity risk is the ina$ility to li*uidate assets or o$tain ade*uate "unding "ro% new $orrowing( -arket li*uidity risk is the ina$ility o" the $ank to easily in wind or o""set speci"ic e9posures without signi"icant losses "ro% inade*uate %arket depth or %arket distur$ances( #his risk is greatest when risky securities are trading at high pre%iu%s to low-risk #reasury securities $ecause %arket participants are a!oiding high-risk $orrowers( 4 "ir% can pro!ide "or its li*uidity needs in one o" two ways& 3i8 $y holding li*uid assets+ and 3ii8 $y securing its a$ility to $orrow 3issuing new lia$ilities8 at reasona$le costs( #hus+ when $anks need cash+ they can either sell li*uid assets or increase $orrowings( Li*uidity risk %easures+ there"ore+ "ocus on the *uantity and *uality o" li*uid assets near %aturity or a!aila$le-"or-sale at reasona$le prices+ as well as the $ankEs a$ility to cheaply and easily $orrow "unds to %eet cash out"lows( Mar$et Ris$: -arket risk is the current and potential risk to earnings and stockholdersE e*uity resulting "ro% ad!erse %o!e%ents in %arket re$ates or prices( #he three areas o" %arket risk are& interest rate or rein!est%ent rate risk+ e*uity or security price risk+ and "oreign e9change risk( o ,nterest rate risk is the potential !aria$ility in a $ankEs net interest inco%e and %arket !alue o" e*uity due to changes in the le!el o" %arket interest rates( o )*uity and security price risk is the potential risk o" loss associated with the $ankEs trading account port"olios( o /oreign e9change risk is the risk to a "inancial institutionEs condition resulting "ro% ad!erse %o!e%ents in "oreign e9change rates( ?nterest rate ris$: ,nterest rate risk analysis co%pares the sensiti!ity o" interest inco%e to changes in asset yields with the sensiti!ity o" interest e9pense to changes in the interest costs o" lia$ilities( #his is done using >4P and earnings sensiti!ity analysis( #he purpose is to deter%ine how %uch net interest inco%e will !ary with %o!e%ents in %arket interest rates( 4 %ore co%prehensi!e port"olio analysis approach co%pares the duration o" assets with the duration o" lia$ilities using duration gap and econo%ic !alue o" e*uity sensiti!ity analysis to assess the i%pact o" rate changes on net interest inco%e and the %arket !alue 3or price8 o" stockholdersE e*uity( 'uration is an elasticity %easure that indicates the relati!e price sensiti!ity o" di""erent securities( Both >4P and duration gap "ocus on %is%atched asset and lia$ility %aturities and durations as well as potential changes in interest rates( 4n asset or lia$ility is rate sensiti!e i" %anage%ent e9pects it to $e reprised 3change o" rate8 within a certain ti%e period( O(erational ris$: ;e"ers to the possi$ility that operating e9penses %ight !ary signi"icantly "ro% what is e9pected+ producing a decline in net inco%e and "ir% !alue( #he Basel Co%%ittee de"ines operational risk as& F#he risk o" loss resulting "ro% inade*uate or "ailed internal processes+ people+ and syste%s+ or "ro% e9ternal e!ents(G Salient "eatures O% a &an$3s Credit /olic#: Be"ore discussing the salient "eatures we %ust know the purpose o" a credit policy( :ince loans. ad!ances are the largest and %ost signi"icant asset in $ankEs $alance sheet and ha!e a $earing on the pro"ita$ility and "inancial health o" the $ank as such it is !ery %uch i%portant that $oard o" a director o" a $ank "or%ulates a credit policy( ,t pro!ides the policy "ra%e work as well as a docu%ent "or i%ple%entation at all tiers o" the organi2ation( #he credit policy %ust clearly e9plain the $asic principles go!erning the dis$urse%ent o" "inance. credit( it lays down a $roader "ra%ework and helps the $anks to carry on its acti!ities o!er a long period o" ti%e( #he $ank is a$le to take care o" the co%petiti!e en!iron%ent and is also a$le to sa"e guard against "uture challenges( ,t also pro!ides 184 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU encourage%ent to "ield o""icers to discharge their duties within the "ra%e work o" the policy without any hesitation( #he "ield o""icers and other e9ecuti!es can per"or% their "unctions within the delegated powers assigned to the% under the policy( o Credit should $e in line with the prudential regulations issued $y the :tate Bank o" Pakistan o Credit should $e sel" li*uidated that is it should $e supported $y "uture cash "lows( o Credit policy should enco%pass that credit is structured to %eet custo%ers need( o Bankers e!aluate the proDected cash "lows o" the prospecti!e $orrower $e"ore dis$ursing the loans( o #he credit policy %ust $e di!ersi"ied with respect to industries.$usiness and regions( o Credit policy %ust ensure that re*uest "ro% de"aulter o" other $anks are not entertain( o #o sa"e guard against e9pected losses+ the $ank %ust o$tain collaterals. securities and also %aintain ade*uate %argins( #here are two types o" %argins+ one is called the statutory %argins which are "i9ed $y the :tate Bank o" Pakistan and it is o$ligatory on $anks to strictly co%ply with these %argins( 1owe!er it is up to the discretion o" the $ank to o$tain additional %argins( #he second is the discretionary %argin( #he credit %ust $e within $ankEs target %arket and within risk assets acceptance criteria( Overvie' o% credit c#cle o /irst o" all the prospecti!e $orrower approaches the $ank o #he credit o""icer has to process and e!aluate the credit proposal o #he credit e!aluation would di""er on case to case $asis( o #he "ollowing steps are taken in credit e!aluation process& 4pplicantsE pro"ile and track record /inancial analysis on the $asis o" $alance sheet and pro"it and loss account and other rele!ant in"or%ation data( Capacity o" the $orrower to repay the loan( #echnical and econo%ic appraisal+ where!er re*uired 4ppro!al o" the credit re*uest $y the co%petent authority. co%%ittee Co%pletion o" docu%entation "or%alities and e9ecution o" securities. collaterals 'is$urse%ent o" loan( 1owe!er+ continuous "ollow up till the reco!ery o" the entire credit re%ains an integrals part o" the credit cycle( T)e (rocess o% credit evaluation and ot)er %actors s)all be discussed in detail in t)e neBt 4essonC
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Banking Laws and Practices-BNK 601 /R?NC?/4ES AN7 "ORMS O" 4EN7?NG
VU LESSON 31
T)e Credit /rocess Credit is the li"e line o" the $anking $usiness( #he "unda%ental o$Decti!e o" a co%%ercial $ank is to %ake pro"ita$le loans with %ini%u% risk( Bank %anage%ent should target speci"ic industries and %arkets in which lending o""icers ha!e e9pertise( 1owe!er+ while co%peting goals o" loan !olu%e and loan *uality %ust $e $alance with the $anks li*uidity re*uire%ents+ capital constraints and rate o" return o$Decti!es( #he credit process relies on each $ankEs syste% and controls that allow %anage%ent and credit o""icers to e!aluate risk and return trade-o""s( #he credit process includes three "unctions& o Business de!elop%ent and credit analysis o nderwriting or credit e9ecution and ad%inistration o Credit re!iew 4 credit policy "or%ali2es lending guidelines that e%ployees "ollow to conduct $ank $usiness( 4s already pointed out in our pre!ious discussion that it identi"ies pre"erred loan *ualities and esta$lishes procedures "or granting+ docu%enting and re!iewing loans( #he %anage%ents credit philosophy deter%ines how %uch risk the $ank will take and in what "or%( 1ere we need to know a !ery i%portant concept that is called a $ankEs credit culture( #his re"ers to the "unda%ental principles that dri!e lending acti!ities and how %anage%ent analysis risk( #his lending philosophy would di""er "ro% $ank to $ank( 1owe!er there are three loan credit cultures na%ely& !alue dri!en+ current-pro"it dri!en and %arket share dri!en( :alient "eatures o" these credit cultures are outlined $elow& Values 7riven: o /ocus is on credit *uality with strong risk %anage%ent syste%s and controls( o Pri%ary e%phasis is on $ank soundness and sta$ility and a consistent %arket presence( o nderwriting is conser!ati!e and signi"icant loan concentrations are not allowed( o #ypical outco%e is lower current pro"it "ro% loans with "ewer loan losses( Current+/ro%it 7riven: o /ocus is on short-ter% earnings o Pri%ary e%phasis is $ankEs annual pro"it plan( o -anage%ent is o"ten attracted to high-risk and high-return $orrowers( o =utco%e is typically higher pro"it in good ti%es+ "ollowed $y lower pro"it in $ad ti%es when loan losses increase( Mar$et+S)are 7riven: o /ocus is on ha!ing the highest %arket share o" loans a%ong co%petitors( o Pri%ary e%phasis is on loan !olu%e and growth with the intent o" ha!ing the largest %arket share( o nderwriting is !ery aggressi!e and %anage%ent accepts loan concentrations and a$o!ea!erage credit risk( o =utco%e is that loan *uality su""ers o!er ti%e+ while pro"it is %odest $ecause loan growth co%es "ro% $elow-%arket pricing and greater risk taking( Credit Evaluation9 Credit Anal#sis 4s a custo%er approaches a $ank with a loan re*uest+ the credit o""icers analy2e all a!aila$le in"or%ation to deter%ine weather the loan %eets the $ankEs risk-return o$Decti!es( Credit analysis is essentially de"ault risk analysis in which a loan o""icer atte%pts to e!aluate a $orrowerEs a$ility and willingness to repay( ,n this analysis "ollowing i%portant *uestions arise which are looked into $y the credit o""icer& 1( <hat risks are inherent in the operations o" the $usinessR @( <hat ha!e %anagers done or "ailed to do in %itigating those risksR 186 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 ?( 1ow can a lender structure and control its own risks in supplying "undsR
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#he "irst *uestion "orces the credit analyst to generate a risk o" "actors that indicate what could har% the $orrowerEs a$ility to repay( #he second recogni2es that repay%ent is largely a "unction o" decisions %ade $y a $orrower and weather %anage%ent is aware o" the i%portant risk and necessary skills and re*uired syste%s in place( #he last *uestion "orces the analyst to speci"y how risk can $e control so the $ank can structure an accepta$le loan agree%ent( T)e signi%icant %actors in credit evaluation9 credit anal#sis are enumerated belo': o Credit re*uest not contrary to prudential regulation o" :tate Bank o" Pakistan( o BorrowerEs Credentials o 4%ount o" Credit o BorrowerEs =wn )*uity o ;epay%ent Plan T)e $e# ris$ %actors )ave been classi%ied as t)ree Cs3, %ive Cs3 and seven C3sC Ao'ever t)ese %actors )ave eB(lained b# t)e eB(erts are discussed belo': C)aracter re"ers to the $orrowerEs honesty and trustworthiness( 4n analyst %ust assess the $orrowerEs integrity and su$se*uent intent to repay( ," there are any serious dou$ts+ the loan should $e reDected( Ca(ital re"ers to the $orrowerEs wealth position %easured $y "inancial soundness and %arket standing( Can the "ir% or indi!idual withstand any deterioration in its "inancial positionR Capital helps cushion losses and reduces the likelihood o" $ankruptcy( Ca(acit# in!ol!es $oth the $orrowerEs legal standing and %anage%entEs e9pertise in %aintaining operations so the "ir% or indi!idual can repay its de$t o$ligations( 4 $usiness %ust ha!e identi"ia$le cash "low or alternati!e sources o" cash to repay de$t( 4n indi!idual %ust $e a$le to generate inco%e( Conditions re"er to the econo%ic en!iron%ent or industry-speci"ic supply+ production+ and distri$ution "actors in"luencing a "ir%Es operations( ;epay%ent sources o" cash o"ten !ary with the $usiness cycle or consu%er de%and( Collaterals is the lenderEs secondary source o" repay%ent or security in the case o" de"ault( 1a!ing an asset that the $ank can sei2e and li*uidate when a $orrower de"aults reduces loss+ $ut does not Dusti"y lending proceeds when the credit decision is originally %ade( Com(lacenc# re"ers to the tendency to assu%e that $ecause things were good in the past they will $e good in the "uture( Co%%on e9a%ples are an o!erreliance on guarantors+ reported net worth+ or past loan repay%ent success $ecausthings ha!e always worked out in the past( Carelessness in!ol!es poor underwriting typically e!idenced $y inade*uate loan docu%entation+ a lack o" current "inancial in"or%ation or other pertinent in"or%ation in the credit "iles+ and a lack o" protecti!e co!enants in the loan agree%ent( )ach o" these %akes it di""icult to %onitor a $orrowerEs progress and identi"y pro$le%s $e"ore they are un%anagea$le( Communication ine""ecti!eness re"ers to when a $ankEs credit o$Decti!es and policies are not clearly co%%unicated( #his is when loan pro$le%s can arise( -anage%ent %ust e""ecti!ely co%%unicate and en"orce loan policies and loan o""icers should %ake %anage%ent aware o" speci"ic pro$le%s with e9isting loans as soon as they appearC Contingencies re"er to lendersE tendency to play down or ignore circu%stances in which a loan %ight de"ault( #he "ocus is on trying to %ake a deal work rather than identi"ying downside risk( Co%petition in!ol!es "ollowing co%petitorsE $eha!ior rather than %aintaining the $ankEs own credit standards( 'oing so%ething $ecause the $ank down the street is doing it does not %ean itEs a prudent $usiness practice( Credit Anal#sis: #he "or%al credit analysis procedure includes a su$Decti!e e!aluation o" the $orrowerEs re*uest and a detailed re!iew o" all "inancial state%ents( Credit depart%ent e%ployees %ay per"or% the initial *uantitati!e analysis "or the loan o""icer( #he process consists o"& C Collecting in"or%ation "or the credit "ileJ such as credit history and per"or%ance( Copyright Virtual ni!ersity o" Pakistan 187
Banking Laws and Practices-BNK 601 VU !C )!aluating %anage%ent+ the co%pany+ and the industry in which it operatesJ that is+ e!aluation o" internal and e9ternal "actors( *C :preading "inancial state%entsJ that is+ "inancial state%ent analysis 1C ProDecting the $orrowerEs cash "low and thus its a$ility to ser!ice the de$t 0C )!aluating collateral or the secondary source o" repay%ent .C <riting a su%%ary analysis and %aking a reco%%endation( 5C #rack record o" client 6C Pu$lished.unpu$lished reports regarding $usiness.co%pany -C ,ndustry analysis( 8C #rade Aournals( C Le!el o" co%petition( !C Pri!ate on-line in"or%ation syste%( Credit EBecution and Administration: #he loans are appro!ed $y co%petent authorities. credit co%%ittees( 4"ter appro!al o" the loan+ the $orrower is inti%ated and a loan agree%ent. sanction ad!ice is prepaid( #his agree%ent "or%ali2es the purpose o" loan+ the ter%s+ repay%ent schedule+ collateral re*uired+ any ter% and condition o" the loan( #he credit o""icer then checks that all loan docu%entation has $een co%pleted and is in order( 4ny co%$ination o" the "ollowing collaterals. securities is also re*uired to $e "urnished $y the $orrower& -ortgage Pledge 1ypothecation Lien >uarantees Listed stocks and go!ern%ent securities =n co%pletion o" the a$o!e+ the $orrower signs the agree%ent and the loan is dis$ursed to the $orrower( 4oan Revie': #he loan re!iew e""ort is directed at reducing credit risk as well as handling pro$le% loans and li*uidating assets o" "ailed $orrowers( )""ecti!e credit %anage%ent separates loan re!iew "ro% credit analysis+ e9ecution+ and ad%inistration( #he re!iew process can $e di!ided into two "unctions& %onitoring the per"or%ance o" e9isting loans and handling pro$le% loans( -any $anks ha!e a "or%al loan re!iew co%%ittee+ independent o" loan o""icers+ that reports directly to the chie" e9ecuti!e o""icer and directorsE loan co%%ittee( Loan re!iew personnel audit current loans to !eri"y that the $orrowerEs "inancial condition is accepta$le+ loan docu%entation is in place+ and pricing %eets return o$Decti!es( ," the audit unco!ers pro$le%s+ the co%%ittee initiates correcti!e action( ;e%o!ing the pro$le% %ay si%ply in!ol!e getting signatures on o%itted "or%s or "iling re*uired docu%ents with the state( ," the $orrower has !iolated any loan co!enants+ the loan is in de"ault( #he $ank can then "orce the $orrower to correct the !iolation or it can call the loanJ that is+ re*uest i%%ediate pay%ent( Calling a loan is nor%ally a last resort and done only when the $orrower does not !oluntarily correct the pro$le%( ,t allows the $ank to re*uest "ull pay%ent $e"ore repay%ent prospects worsen( #he pro$le% is %uch %ore serious when the $orrowerEs "inancial condition deteriorates( #hese loans are classi"ied as pro$le% loans and re*uire special treat%ent( ,n %any cases+ the $ank has to %odi"y the ter%s o" the loan agree%ent to increase the pro$a$ility o" "ull repay%ent( -odi"ications include de"erring interest and principal pay%ents+ lengthening %aturities+ and li*uidating unnecessary assets( #he $ank %ay also re*uest additional collateral or guarantees and ask the $orrower to contri$ute e9tra capital( #he purpose is to $uy ti%e until the $orrowerEs condition i%pro!es( Banks o"ten assign a separate loan work-out specialist to pro$le% loans+ rather than traditional loan o""icers+ $ecause they are li*uidation oriented and "re*uently in!ol!ed in intense negotiations( "inancial Anal#sis T#(es o% "inancial Anal#sis: o #rend 4nalysis( o ;atio 4nalysis( 188 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 o Cash 4nalysis( Collaterals Collaterals are discussed in detail in t)e %ollo'ing (aragra()s: Attributes o% good collateral: Collateral is considered to $e good collateral i" it possesses the "ollowing attri$utes( C 4de*uate !C ;eadily en casha$le reali2a$le *C :u""icient(
VU
Ade:uate in Value: Value o" security %ust $e ade*uate to ena$le the $ank to secure the outstanding a%ount o" principal and %ark-up 3interest8( Proper %argins to $e retained while accepting a security Readil# Encas)able 9RealiHable Collateral held $y the $ank should $e readily encasha$le.reali2a$le+ in case the $orrower de"aults without legal co%plications either $y $ank itsel" or through speedy legal process C Su%%icient: #he collateral o""ered $y the $orrower %ust $e su""icient to reco!er the a%ount o" principal.%arkup and any other lia$ilities accruing to the $ank( "orms o% Securities: #he "or%s o" securities as outlined a$o!e are discussed in detail& Mortgage #rans"er o" Property 4ct+ 1CC@ de"ines %ortgage as under& F#he trans"er o" an interest in speci"ic i%%o!ea$le Property "or the purpose o" securing the pay%ent o" %oney ad!anced or to $e ad!anced $y way o" loan+ an e9isting or "uture de$t or per"or%ance o" an engage%ent which %ay gi!e rise to a pecuniary lia$ilityG( Rig)ts o% Mortgagee ;&an$<: #he %ortgagee is !ested with the "ollowing rights o #o sell the %ortgaged property in case o" de"ault $y %ortgagor( o Rig)t to %ore+closureC o Rig)t to %ile suitC T#(es o% Mortgage ,%portant types are e9plained $elow& Registered or 4egal MortgageC #his is created through a "or%al docu%ent called %ortgage deed( -ortgage deed is registered with the ;egistrar o" titles( ,t is co%parati!ely e9pensi!e+ in!ol!es sta%p duty and registration "ee( E:uitable Mortgage: #his is created $y deposit o" title deed $y the %ortgagor( -e%orandu% regarding deposit o" title deed is also signed $y respecti!e parties( Clear title o" the deed %ust $e ascertained $y the $ank.%ortgagee /ledge: 4ccording to section 16@ o" the Contract 4ct+ the pledge is de"ined as under& FPledge is the $ail%ent o" goods as security "or pay%ent o" a de$t or per"or%ance o" a pro%iseG( &ailment ccording to !ection %45 of a Contract ct %567, bailment is defined as under/ Copyright Virtual ni!ersity o" Pakistan 189
Banking Laws and Practices-BNK 601 VU F4 $ail%ent is the deli!ery o" goods $y one person to another "or so%e purpose upon a contract that they shall+ when the purpose is acco%plished $e returned or otherwise disposed o" according to the directions o" the person deli!ering the%G( Rig)ts o% t)e /ledgee: o #he pledgee 3Bank8 has actual control o" pledged stocks.>oods( o Pledgee can sell pledged stocks $y gi!ing reasona$le notice to the $orrower( A#(ot)ecation: F1ypothecation is a legal transaction+ where$y goods %ay $e %ade a!aila$le as security "or a de$t without trans"erring possession to the lenderG( Rig)ts o% 4ender ;&an$< in case o% )#(ot)ecation #o inspect >odowns( #o de%and stock reports "ro% the $orrower( #o get the stocks insured( 4ien: FLien is a charge gi!en $y the custo%er 3$orrower8 to a $ank o!er so%e securitiesG( Letter o" lien %ust $e o$tained "ro% the $orrower 3custo%er8( ,t can $e o!er stocks 3shares8+ "i9ed deposits+ $ank accounts etc( ,n case the security o""ered is issued $y the third party the notice %ay $e issued to the respecti!e party regarding the sa%e( 4ien to be noted on t)e said (ro(ert#9securit#C 4ccording to co%panies ordinance 15C7 Fe!ery charge created $y a li%ited co%pany %ust $e registered with the ;egistrar o" Co%paniesC Contract o% ?ndemnit# 4 contract+ $y which one party pro%ises to sa!e the other "ro% loss caused to hi% $y the conduct o" the Pro%isor hi%sel"+ or $y the conduct o" any other person+ is called a Lcontract o% indemnit#PC All Contracts o% ?nsurance are contracts o% indemnit# eBce(t li%e insurance ,n such contracts an insurance co%pany 3insurer8 undertakes to inde%ni"y the respecti!e party 3assured8+ o" the losses su""ered $y the assured in the %anner and to the e9tent agreed in the contract( Rig)ts o% ?ndemnit# Aolder 2)en Sued: o o o 1e can reco!er all da%ages incurred .Paid $y hi%( 1e can reco!er costs incurred( 1e can reco!er su%s paid under co%pro%ise+ i" any(
Rig)ts o% ?ndemni%ier Settled (rinci(le o% la' : it is a settled principle o" law that a"ter co%pensating the loss to inde%nity holder+ inde%ni"ier is entitled to all the ways and %eans $y which person inde%ni"ied %ight ha!e protected hi%sel" "or the loss( Time o% Commencement o% ?ndemni%ier3s 4iabilit#: this co%%ences when inde%nity holder incurs an a$solute lia$ility though not actual loss( Guarantee: ?t )as been de%ined in section !. o% t)e Contract Act 65! ')ic) is re(roduced belo': F4 contract o" guarantee is a contract to per"or% the pro%ise or discharge the lia$ility o" a third person in case o" his de"aultG( #he person who gi!es the guarantee is called the FsuretyGJ the person in respect 190 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU o" whose de"ault the guarantee is gi!en is called the Fprincipal de$torG+ and the person to who% the guarantee is gi!en is called the FcreditorG( 4 guarantee %ay $e either oral or written( >inds o% Guarantee S(eci%ic Guarantee or ;Ordinar# Guarantee< #his guarantee is restricted to a speci"ic transaction or engage%ent( /or e9a%ple a!ailing a loan "ro% a $ank( Continuing Guarantee: :uch guarantee co!ers a series o" transactions( /or e9a%ple guarantee "urnished to a supplier "or %aking supplies during the ne9t one year( T#(e o% "inances9Credits 9 "orms o% 4ending #he "inances are classi"ied as /und- Based 0 Non-/und Based "und+ based credits include: Cash /inance+ =!erdra"t+ Loans+ Purchase. 'iscounting o" $ill o" e9change+ )9port "inance+ ,%port "inance+ sectoral "inance+ consortiu% "inance( Non+"und &ased: #hese include letter o" credit+ $ank guarantee+ tender guarantee+ and per"or%ance guarantee(8 Trade "inances 'it) res(ect to international transactions include t)e %ollo'ing: EB(ort %inance: ,n the e9port "inance+ the "ollowing types o" "acilities are included& o /inance against "oreign $ills( o /oreign $ill purchased( o Packing credits( o :BPEs e9port "inance sche%e ?m(ort "inancesC (n the im)o"t *inan'e+ the *ollo,in- ty)es o* *a'ilities a"e in'l.$e$ ,%port letter o" credit( o Pay%ent against 'ocu%ents( P4' 0 also3 /orced P4'8 o /inance against #rust ;eceipt 3/#;8 o /inance against ,%ported -erchandise 3/,-8( Sectoral %inances ?nclude: 4%ong others these includes the "ollowing& o ,ndustrial /inance( o 4gricultural /inance( o /inance "or Construction.1ousing( o Consu%er /inance ?n S#ndicated %inance9Consortium %inance o ,n syndicated "inance+ nu%$er o" $anks participate o #here is also a lead Bank and Lead -anager( o #he $anks who participate in this type o" "inancing are called Participating Banks( o ,n this type o" "inancing large a%ount o" %oney is in!ol!ed hence Borrowers co%prise o" >o!ern%ent.Pu$lic sector organi2ations or corporate entities 4s we ha!e already discussed all the steps in loan sanctioning such as credit loan structuring+ pricing+ Packaging+ 'ocu%entation+ 'is$urse%ent+ -onitoring 0 "ollow-up process as usual are carried on $ut with special technical skill and pro"essional e9pertise(
191
Banking Laws and Practices-BNK 601 4ETTER O" CRE7?T
VU LESSON 32
?nternational &an$ing and ?nternational Trade com(lementar# to eac) ot)erC /acilitating international trade is the %ost i%portant acti!ity o" international $anking( )9porter 3seller8 and ,%porter 3$uyer8 are two i%portant players in international trading acti!ity( 2)at t)e seller ;eB(orter< 'ants Contract "ul"ill%ent 3pay%ent8 Con!enience 3o" recei!ing pay%ent in a $ank in his own country8 Pro%pt Pay%ent )9pert 4d!ice( 2)at t)e bu#er ;?m(orter< 'ants Contract "ul"ill%ent 3>oods8 Con!enience o" using an inter!ening third party in who% $oth ha!e con"idence+ such as a $ank( Credit -possi$ility o" o$taining "inance( )9pert ad!ice and assistance( Letter o" credit pro!ides the %echanis% to "ul"ill the a$o!e re*uire%ents o" e9porters and i%porters( 4etter o% Credit 4 Letter o" Credit is a pay%ent ter% generally used "or international sales transactions( ,t is $asically a %echanis%+ which allows i%porters.$uyers to o""er secure ter%s o" pay%ent to e9porters.sellers in which a $ank 3or %ore than one $ank8 gets in!ol!ed( #he technical ter% "or Letter o" credit is H'ocu%entary CreditH( 4t the !ery outset one %ust understand is that Letters o" credit deal in docu%ents+ not goods( #he idea in an international trade transaction is to shi"t the risk "ro% the actual $uyer to a $ank( #hus a LC 3as it is co%%only re"erred to8 is a pay%ent undertaking gi!en $y a $ank to the seller and is issued on $ehal" o" the applicant i(e( the $uyer( #he Buyer is the 4pplicant and the :eller is the Bene"iciary( #he Bank that issues the LC is re"erred to as the ,ssuing Bank which is generally in the country o" the Buyer( #he Bank that 4d!ises the LC to the :eller is called the 4d!ising Bank which is generally in the country o" the :eller( #he speci"ied $ank %akes the pay%ent upon the success"ul presentation o" the re*uired docu%ents $y the seller within the speci"ied ti%e "ra%e( Note that the Bank scrutini2es the Hdocu%entsH and not the HgoodsH "or %aking pay%ent( #hus the process works $oth in "a!or o" $oth the $uyer and the seller( #he :eller gets assured that i" docu%ents are presented on ti%e and in the way that they ha!e $een re*uested on the LC the pay%ent will $e %ade and Buyer on the other hand is assured that the $ank will thoroughly e9a%ine these presented docu%ents and ensure that they %eet the ter%s and conditions stipulated in the LC( Ao' 4etters o% Credit Can Ael( =ou &uild =our &usiness Letters o" credit are a ti%e-honored instru%ent "or trade "inance( <e ha!e "ound the% use"ul "or any nu%$er o" i%port deals( #he use"ulness o" docu%entary letters o" credit+ "or instance+ deri!es "ro% the "act that they pro!ide %utual protection "or $oth the i%porter and the e9porter( 4s e!eryone engaged in international trade knows+ anything that re%o!es headaches is generally a good thing( 'ocu%entary letters o" credit are also handy "or co%%odity-type transactions(
192
Banking Laws and Practices-BNK 601 4etters o% Credit ++ a Solution to Man# Trade "inance Needs
VU
Letters o" credit are tools to aid i%porters to le!erage their capital $ase and their a$ility to capture %ore trading opportunities( 4 Letter o" Credit allows i%porters.$uyers to o""er secure ter%s o" pay%ent to e9porters.sellers in which a $ank 3or %ore than one $ank8 gets in!ol!ed( #he technical ter% "or Letter o" credit is H'ocu%entary Letter o" CreditH( Letters o" Credit 3LCHs8 deal in docu%ents+ not goods( #he idea in an international trade transaction is to shi"t the risk "ro% the actual $uyer to a $ank( #hus an LC is a pay%ent undertaking gi!en $y a $ank to the Bene"iciary 3the seller8 and is issued on $ehal" o" the applicant 3the $uyer8( #he Bank that issues the LC is re"erred to as the ,ssuing Bank+ generally in the country o" the Buyer( #he Bank that 4d!ises the LC to the seller is called the 4d!ising Bank which is generally in the country o" the seller( #he speci"ied $ank %akes the pay%ent upon the success"ul presentation o" the re*uired docu%ents $y the seller within the speci"ied ti%e "ra%e( Note that the Bank scrutini2es the Hdocu%entsH and not the HgoodsH "or %aking pay%ent( #his process gi!es $oth the $uyer and the seller co%"ort that the trans"er o" ownership to the goods will occur properly and when pay%ent is secure( #he seller gets assured that i" docu%ents are presented on ti%e and in the way that they ha!e $een re*uested on the LC the pay%ent will $e %ade( #he $uyer is assured that the $ank will thoroughly e9a%ine these presented docu%ents and ensure that they %eet the ter%s and conditions stipulated in the LC( 'ocu%ents re*uested in a Letter o" Credit would o"ten include& a co%%ercial in!oiceJ a transport docu%ent such as a Bill o" lading or 4irway $illJ an insurance docu%entJ an inspection certi"icateJ and.or a certi"icate o" origin( =ther docu%ents could $e re*uired+ depending on the underlying transaction( Keep in %ind that the Letter o" Credit process re!ol!es around docu%ents+ not goods( #he LC could $e Hirre!oca$leH or Hre!oca$leH( 4n irre!oca$le LC cannot $e changed unless $oth the $uyer and seller agree( <hereas in a re!oca$le LC changes to the LC can $e %ade without the consent o" the $ene"iciary( 4 HsightH LC %eans that pay%ent is %ade i%%ediately to the $ene"iciary.seller.e9porter upon presentation o" the correct docu%ents in the re*uired ti%e "ra%e( 4 Hti%eH or HdateH LC will speci"y when pay%ent will $e %ade at a "uture date and upon presentation o" the re*uired docu%ents 4 letter o" credit can %ake a $ig di""erence to an i%porter( -any international deals Dust canHt happen without a letter o" credit( 4nd when you cut through all the %u%$o-Du%$o(((((((this is a tool that allows $uyers and sellers to do $usiness with greater con"idence( Met)od o% "inancing ?nternational Trade: Letter o" credit is one o" the %ethods o" "inancing international trade+ there are other %ethods o" "inancing international trade and those are outlined and e9plained $elow& o =pen account %ethod o 'ocu%entary collection and o Pay%ent in ad!ance. Cash in ad!ance O(en Account Met)od 4n open account transaction %eans that the goods are shipped and deli!ered $e"ore pay%ent is due+ usually in ?0 to 50 days( =$!iously+ this is the %ost ad!antageous option to the i%porter in cash "low and cost ter%s+ $ut it is conse*uently the highest risk option "or an e9porter( Because o" the intense co%petition "or e9port %arkets+ "oreign $uyers o"ten press e9porters "or open account ter%s( ,n addition+ the e9tension o" credit $y the seller to the $uyer is %ore co%%on a$road( #here"ore+ e9porters who are reluctant to e9tend credit %ay "ace the possi$ility o" the loss o" the sale to their co%petitors( 1owe!er+ while this %ethod o" pay%ent will de"initely enhance e9port co%petiti!eness+ e9porters should thoroughly e9a%ine the political+ econo%ic+ and co%%ercial risks+ as well as cultural in"luences to ensure that pay%ent will $e recei!ed in "ull and on ti%e( ,t is possi$le to su$stantially %itigate the risk o" Copyright Virtual ni!ersity o" Pakistan 193
Banking Laws and Practices-BNK 601 VU nonpay%ent associated with open account trade $y using such trade "inance techni*ues as e9port credit insurance and "actoring( )9porters %ay also wish to seek e9port working capital "inancing to ensure that they ha!e access to "inancing "or $oth the production "or e9port and "or any credit while waiting to $e paid( >e# /oints #he goods+ along with all the necessary docu%ents+ are shipped directly to the i%porter who agrees to pay the e9porterEs in!oice at a "uture date+ usually in ?0 to 50 days( )9porter should $e a$solutely con"ident that the i%porter will accept ship%ent and pay at agreed ti%e and that the i%porting country is co%%ercially and politically secure( =pen account ter%s %ay help win custo%ers in co%petiti!e %arkets+ i" used with one or %ore o" the appropriate trade "inance techni*ues that %itigate the risk o" nonpay%ent( Ao' to O%%er O(en Account Terms in Com(etitive Mar$ets =pen account ter%s %ay $e o""ered in co%petiti!e %arkets with the use o" one or %ore o" the "ollowing trade "inance techni*ues& 318 )9port <orking Capital /inancing+ 3@8 >o!ern%ent->uaranteed )9port <orking Capital Progra%s+ 3?8 )9port Credit ,nsurance+ 378 )9port /actoring+ and 3B8 /or"eiting( -ore detailed in"or%ation on each trade "inance techni*ue is pro!ided in other sections o" the Trade 3inance 'uide EB(ort 2or$ing Ca(ital "inancing #o e9tend open account ter%s in the glo$al %arket+ the e9porter who lacks su""icient li*uidity needs e9port working capital "inancing that co!ers the entire cash cycle "ro% purchase o" raw %aterials through the ulti%ate collection o" the sales proceeds( )9port working capital "acilities can $e pro!ided to support e9port sales in the "or% o" a loan or re!ol!ing line o" credit( Government+Guaranteed EB(ort 2or$ing Ca(ital /rograms #he )9port-,%port Bank o" the nited :tates and the (:( :%all Business 4d%inistration o""er progra%s that guarantee e9port working capital "acilities to (:( e9porters( <ith these progra%s+ (:( e9porters are a$le to o$tain needed "acilities "ro% co%%ercial lenders when "inancing is otherwise not a!aila$le or when their $orrowing capacity needs to $e increased( EB(ort Credit ?nsurance )9port credit insurance pro!ides protection against co%%ercial lossesNde"ault+ insol!ency+ $ankruptcy+ and political lossesNwar+ nationali2ation+ currency incon!erti$ility+ etc( ,t allows e9porters to increase sales $y o""ering li$eral open account ter%s to new and e9isting custo%ers( ,nsurance also pro!ides security "or $anks pro!iding working capital and "inancing e9ports( EB(ort "actoring /actoring in international trade is the discounting o" a short-ter% recei!a$le 3up to 1C0 days8( #he e9porter trans"ers title to its short-ter% "oreign accounts recei!a$le to a "actoring house "or cash at a discount "ro% the "ace !alue( ,t allows an e9porter to ship on open account as the "actor assu%es the "inancial a$ility o" the i%porter to pay and handles collections on the recei!a$les( #he "actoring house usually works with consu%er goods( "or%eiting /or"eiting is a %ethod o" trade "inancing that allows the e9porter to sell its %ediu%-ter% recei!a$les 31C0 days to 6 years8 to the "or"eiter at a discount+ in e9change "or cash( <ith this %ethod+ the "or"eiter assu%es all the risks+ ena$ling the e9porter to e9tend open account ter%s and incorporate the discount into the selling price( /or"eiters usually work with capital goods+ co%%odities+ and large proDects( 7ocumentar# Collections 194 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU 4 docu%entary collection 3'.C8 is a transaction where$y the e9porter entrusts the collection o" pay%ent to the re%itting $ank 3e9porterEs $ank8+ which sends docu%ents to a collecting $ank 3i%porterEs $ank8+ along with instructions "or pay%ent( /unds are recei!ed "ro% the i%porter and re%itted to the e9porter through the $anks in!ol!ed in the collection in e9change "or those docu%ents( '.Cs in!ol!e the use o" a dra"t that re*uires the i%porter to pay the "ace a%ount either on sight 3docu%ent against pay%entN'.P8 or on a speci"ied date in the "uture 3docu%ent against acceptanceN'.48( #he dra"t lists instructions that speci"y the docu%ents re*uired "or the trans"er o" title to the goods( 4lthough $anks do act as "acilitators "or their clients under collections+ docu%entary collections o""er no !eri"ication process and li%ited recourse in the e!ent o" nonpay%ent( 'ra"ts are generally less e9pensi!e than letters o" credit 3LCs8( >e# /oints '.Cs are less co%plicated and less e9pensi!e than LCs( nder a '.C transaction+ the i%porter is not o$ligated to pay "or goods prior to ship%ent( #he e9porter retains title to the goods until the i%porter either pays the "ace a%ount on sight or accepts the dra"t to incur a legal o$ligation to pay at a speci"ied later date( Banks that play essential roles in transactions utili2ing '.Cs are the re%itting $ank 3e9porterEs $ank8 and the collecting $ank 3i%porterEs $ank8( <hile the $anks control the "low o" docu%ents+ they do not !eri"y the docu%ents nor take any risks+ $ut can in"luence the %utually satis"actory settle%ent o" a '.C transaction( T#(ical Sim(li%ied 79C Transaction "lo' 1( #he e9porter ships the goods to the i%porter and recei!es in e9change the docu%ents( @( #he e9porter presents the docu%ents with instructions "or o$taining pay%ent to its $ank( ?( #he e9porterEs re%itting $ank sends the docu%ents to the i%porterEs collecting $ank( 7( #he collecting $ank releases the docu%ents to the i%porter upon receipt o" pay%ent( B( =r the collecting $ank releases the docu%ents on acceptance o" dra"t "ro% the i%porter( 6( #he i%porter then presents the docu%ents to the carrier in e9change "or the goods( 6( 1a!ing recei!ed pay%ent+ the collecting $ank "orwards proceeds to the re%itting $ank( C( =nce pay%ent is recei!ed+ the re%itting $ank credits the e9porterEs account( 7ocuments against Acce(tance ;79A< Collection nder a '.4 collection+ the e9porter e9tends credit to the i%porter $y using a ti%e dra"t( ,n this case+ the docu%ents are released to the i%porter to recei!e the goods upon acceptance o" the ti%e dra"t( By accepting the dra"t+ the i%porter $eco%es legally o$ligated to pay at a "uture date( 4t %aturity+ the collecting $ank contacts the i%porter "or pay%ent( pon receipt o" pay%ent+ the collecting $ank trans%its the "unds to the re%itting $ank "or pay%ent to the e9porter( Time o% /a#ment: =n %aturity o" dra"t at a speci"ied "uture date Trans%er o% Goods& Be"ore pay%ent+ $ut upon acceptance o" dra"t EB(orter Ris$: 1as no control o" goods and %ay not get paid at due date 2)en to Use 7ocumentar# Collections nder '.C transactions+ the e9porter has little recourse against the i%porter in case o" nonpay%ent( #hus+ the '.C %echanis% should only $e used under the "ollowing conditions& #he e9porter and i%porter ha!e a well-esta$lished relationship( #he e9porter is con"ident that the i%porting country is sta$le politically and econo%ically( 4n open account sale is considered too risky+ $ut an LC is also too e9pensi!e "or the i%porter( Cas)+in+Advance <ith the cash-in-ad!ance pay%ent %ethod+ the e9porter can a!oid credit risk or the risk o" nonpay%ent+ since pay%ent is recei!ed prior to the trans"er o" ownership o" the goods( <ire trans"ers and credit cards are the %ost co%%only used cash-in-ad!ance options a!aila$le to e9porters( 1owe!er+ re*uiring Copyright Virtual ni!ersity o" Pakistan 195
Banking Laws and Practices-BNK 601 VU pay%ent in ad!ance is the least attracti!e option "or the $uyer+ as this %ethod tends to create cash "low pro$le%s+ and unless the seller sees no other option or the $uyer has other !endors to choose "ro%+ it o"ten is not a co%petiti!e option( ,n addition+ "oreign $uyers are o"ten concerned that the goods %ay not $e sent i" pay%ent is %ade in ad!ance( )9porters that insist on this %ethod o" pay%ent as their sole %ethod o" doing $usiness %ay "ind the%sel!es losing out to co%petitors who %ay $e willing to o""er %ore attracti!e pay%ent ter%s(
>e# /oints /ull or signi"icant partial pay%ent is re*uired+ usually !ia credit card or $ank.wire trans"er+ prior to the trans"er o" ownership o" the goods( Cash-in-ad!ance+ especially a wire trans"er+ is the %ost secure and "a!ora$le %ethod o" international trading "or e9porters and+ conse*uently+ the least secure and attracti!e option "or i%porters( 1owe!er+ $oth the credit risk and the co%petiti!e landscape %ust $e considered( ,nsisting on these ter%s ulti%ately could cause e9porters to lose custo%ers to co%petitors who are willing o""er %ore "a!ora$le pay%ent ter%s to "oreign $uyers in the glo$al %arket( Creditworthy "oreign $uyers+ who pre"er greater security and $etter cash utili2ation+ %ay "ind cash-in-ad!ance ter%s unaccepta$le and %ay si%ply walk away "ro% the deal( 2ire Trans%erDMost Secure and /re%erred Cas)+in+Advance Met)od 4n international wire trans"er is co%%only used and has the ad!antage o" $eing al%ost i%%ediate( )9porters should pro!ide clear routing instructions to the i%porter when using this %ethod+ including the na%e and address o" the recei!ing $ank+ the $ankEs :<,/#+ #ele9+ and 4B4 nu%$ers+ and the sellerEs na%e and address+ $ank account title+ and account nu%$er( #his option is %ore costly to the i%porter than other options o" cash-in-ad!ance %ethod+ as the "ee "or an international wire trans"er is usually paid $y the sender( 2)en to Use Cas)+in+Advance Terms #he i%porter is a new custo%er and.or has a less-esta$lished operating history( #he i%porterEs creditworthiness is dou$t"ul+ unsatis"actory+ or un!eri"ia$le( #he political and co%%ercial risks o" the i%porterEs ho%e country are !ery high( #he e9porterEs product is uni*ue+ not a!aila$le elsewhere+ or in hea!y de%and( #he e9porter operates an ,nternet-$ased $usiness where the use o" con!enient pay%ent %ethods is a %ust to re%ain co%petiti!e( ,n ,nternational trade+ the $uyer and the seller who are located in di""erent countries+ %ay not know each other and hence %any ti%es the pro$le% o" BuyerEs Creditworthiness ha%pers the trade $etween the $uyer and the seller( #he %ain o$Decti!es o" the $uyer and the seller in any international trade and contradictory in ter%s o" Buyer will always try to delay the pay%ent while the seller would like to recei!e "unds at the earliest( #o %itigate this pro$le%+ :eller always re*uest Buyer to arrange "or a Letter o" Credit to $e issued $y BuyerEs Bank( pon issuance o" Letter o" Credit+ the BuyerEs $ank replaces its own Creditworthiness to that o" the Buyer+ it undertakes to rei%$urse the :eller "or the !alue o" the Letter o" Credit F,rre!oca$lyG pro!ided two underline conditions are "ul"illed $y the :eller& C 4ll the docu%ents stated in the LC are presentedJ !C 4ll the ter%s and conditions o" the LC are co%plied with( #he $eauty o" the LC is that i" a$o!e two conditions are "ul"illed+ ,ssuing Bank will e""ect pay%ent to the Bene"iciary+ irrespecti!e o" 4pplicant rei%$urses the ,ssuing Bank or not( #hus+ a Letter o" Credit is an undertaking issued $y a $ank in "a!or o" a Bene"iciary 3:eller8+ which su$stitutes the $ankEs creditworthiness "or that o" the 4pplicant 3Buyer8( 196 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU 2)# 4etterG ,t is na%ed a Letter $ecause initially the LCs were issued %anually in a Letter "or%at address $y ,ssuing Bank to Bene"iciary con"ir%ing its conditional undertaking to rei%$urse the Bene"iciary+ the a%ount o" the LC pro!ided a$o!e @ $asic conditions are "ul"illed( 4etter o% Credit+++General 7e%inition: K4 letter o" credit can $e de"ined as an instru%ent issued $y a $ank in which the $ank "urnishes its credit which is $oth good and well known+ in place o" the $uyerEs credit+ which %ay $e good $ut is not so well known( 4 $ank issues a letter o" credit on $ehal" o" one o" its custo%ers authori2ing an indi!idual or "ir% to draw dra"t 3$ill o" e9change8 on the $ank or one o" its correspondents "or the $ankEs account under certain conditions stipulated in the credit( 7e%inition o% 4CC ;Article ! o% UC/ .88< Credit %eans any arrange%ent+ howe!er na%ed or descri$ed that is irre!oca$le and there$y constitutes a de"inite undertaking o" the issuing $ank to honor a co%plying presentation( Com(l#ing (resentation& %eans a presentation that is in accordance with the ter%s and conditions o" the credit+ the applica$le pro!isions o" these rules and international standard $anking practice( Article ! o% t)e ?CC, Uni%orm Customs and /ractices, broc)ure 088 ;UC/+088< de%ines a letter o% credit as: K4ny arrange%ent howe!er na%ed or descri$ed+ where$y a $ank issues a letter o" credit on $ehal" o" a custo%er the F4pplicant For on its own $ehal"+ ,s to %ake pay%ent to or to the order o" a third party 3the $ene"iciary8 or is to accept and pay $ills o" e9change 3dra"t8 drawn $y the $ene"iciary or 4uthori2es another $ank to e""ect such pay%ent or to accept and pay such $ills o" e9change 3dra"t8 or 4uthori2es another $ank to negotiate against stipulated docu%ents+ pro!ided the ter%s and conditions o" the credit are co%plied with( 2e s)all continue 'it) t)e t)is to(ic in coming 4esson
197
Banking Laws and Practices-BNK 601 4ETTER O" CRE7?T
VU LESSON 33
2e )ave alread# gone t)roug) general de%inition o% letter o% creditC No' 'e s)all loo$ into various as(ects o% letter o% credit as contained in t)e lig)t o% de%inition contained in UC/ .88 4C as de%ined b# UC/ .88 Credit %eans any arrange%ent+ howe!er na%ed or descri$ed that is irre!oca$le and there$y constitutes a de"inite undertaking o" the issuing $ank to honor a co%plying presentation( Com(l#ing (resentation& %eans a presentation that is in accordance with the ter%s and conditions o" the credit+ the applica$le pro!isions o" these rules and international standard $anking practice( Presentation %eans either the deli!ery o" docu%ents under a credit to the issuing $ank or no%inated $ank or the docu%ents so deli!ered( "or t)e sa$e o% com(arison and understanding t)e need %or UC/ .88 'e give )ereunder t)e de%inition as contained in Article ! o% t)e ?CC, Uni%orm Customs and /ractices, broc)ure 088: K4ny arrange%ent howe!er na%ed or descri$ed+ where$y a $ank issues a letter o" credit on $ehal" o" a custo%er the F4pplicant For on its own $ehal"+ ,s to %ake pay%ent to or to the order o" a third party 3the $ene"iciary8 or is to accept and pay $ills o" e9change 3dra"t8 drawn $y the $ene"iciary or 4uthori2es another $ank to e""ect such pay%ent or to accept and pay such $ills o" e9change 3dra"t8 or 4uthori2es another $ank to negotiate against stipulated docu%ents+ pro!ided the ter%s and conditions o" the credit are co%plied with( &ill o% EBc)ange+;7ra%t<+7e%ined F4 $ill o" e9change is an instru%ent in writing containing an unconditional order+ signed $y the %aker+ directing a certain person+ to pay on de%and or at a "i9ed or deter%ina$le "uture ti%e a certain su% o" %oney only to or to the order o" a certain person or to the $earer o" the instru%ent(G 4 $ill o" e9change drawn paya$le to $earer can not $e %ade paya$le on de%and( Essentials o% bill o% eBc)ange #hese are outlined here under& ,n writing =rder to pay nconditional order :igned $y the drawer 'rawee certain person #i%e o" pay%ent Certain su% Legal tender %oney Payee certain person =ther "or%alities 'ate Place Law"ul consideration ;e!enue sta%p
Sig)t bill o% eBc)ange or Time9 Usance bill o% eBc)ange: Copyright Virtual ni!ersity o" Pakistan 198
Banking Laws and Practices-BNK 601 VU 4ll letters o" credit re*uire the $ene"iciary to present a dra"t and speci"ied docu%ents in order to recei!e pay%ent( 4 dra"t is a written order $y which the party creating it+ orders another party to pay %oney to a third party( 4 dra"t is also called a $ill o" e9change( #here are two types o" dra"ts& sight and ti%e( 4 sight dra"t is paya$le as soon as it is presented "or pay%ent( #he $ank is allowed a reasona$le ti%e to re!iew the docu%ents $e"ore %aking pay%ent( 4 ti%e dra"t is not paya$le until the lapse o" a particular ti%e period stated on the dra"t( #he $ank is re*uired to accept the dra"t as soon as the docu%ents co%ply with credit ter%s( #he issuing $ank has a reasona$le ti%e to e9a%ine those docu%ents( #he issuing $ank is o$ligated to accept dra"ts and pay the% at %aturity( /arties to a 7ocumentar# Credit: A((licant ;o(ener o% 4CC<: %eans the party on whose re*uest the credit is issued( ?ssuing &an$ #he issuing $ankHs lia$ility to pay and to $e rei%$ursed "ro% its custo%er $eco%es a$solute upon the co%pletion o" the ter%s and conditions o" the letter o" credit( nder the pro!isions o" the ni"or% Custo%s and Practice "or 'ocu%entary Credits+ the $ank is gi!en a reasona$le a%ount o" ti%e a"ter receipt o" the docu%ents to honor the dra"t( #he issuing $anksH role is to pro!ide a guarantee to the seller that i" co%pliant docu%ents are presented+ the $ank will pay the seller the a%ount due and to e9a%ine the docu%ents+ and only pay i" these docu%ents co%ply with the ter%s and conditions set out in the letter o" credit( #ypically the docu%ents re*uested will include a co%%ercial in!oice+ a transport docu%ent such as a $ill o" lading or airway $ill and an insurance docu%entJ $ut there are %any others( Letters o" credit deal in docu%ents+ not goods( Advising &an$ 4n ad!ising $ank+ usually a "oreign correspondent $ank o" the issuing $ank will ad!ise the $ene"iciary( >enerally+ the $ene"iciary would want to use a local $ank to insure that the letter o" credit is !alid( ,n addition+ the ad!ising $ank would $e responsi$le "or sending the docu%ents to the issuing $ank( #he ad!ising $ank has no other o$ligation under the letter o" credit( ," the issuing $ank does not pay the $ene"iciary+ the ad!ising $ank is not o$ligated to pay( Con%irming &an$ #he correspondent $ank %ay con"ir% the letter o" credit "or the $ene"iciary( 4t the re*uest o" the issuing $ank+ the correspondent o$ligates itsel" to insure pay%ent under the letter o" credit( #he con"ir%ing $ank would not con"ir% the credit until it e!aluated the country and $ank where the letter o" credit originates( #he con"ir%ing $ank is usually the ad!ising $ank( Nominated &an$9 /a#ing &an$: #he /a#ing &an$ is the $ank no%inated in the letter o" credit that %akes pay%ent to the $ene"iciary+ a"ter deter%ining that docu%ents con"or%+ and upon receipt o" "unds "ro% the issuing $ank or another inter%ediary $ank no%inated $y the issuing $ank( Negotiating ban$: ?t %eans the $ank where negotiation o" docu%ents is carried out( Negotiation %eans the purchase $y the no%inated $ank o" dra"ts and. or docu%ents under a co%plying presentation $y ad!ancing or agreeing to ad!ance "unds to the $ene"iciary on or $e"ore the $anking day on which rei%$urse%ent is due to the no%inated $ank( Modes o% /a#ment o% 4etter o% Credit T)ere are %ollo'ing modes o% (a#ment against letter o% credit: C !C &# negotiation &# acce(tance and (a#ment o% usance bill o% eBc)ange Copyright Virtual ni!ersity o" Pakistan 199
Banking Laws and Practices-BNK 601 *C &# sig)t (a#ment 1C &# de%erred (a#ment
VU
Available b# negotiation 'ocu%ents are presented to negotiating $ank. no%inated $ank a"ter ship%ent o" goods+ the said $ank %akes the pay%ent to the $ene"iciary( ," docu%ents su$%itted are according to the re*uire%ents o" L.C and stipulation o" L.C are "ul"illed+ the negotiating $ank shall recei!e the negotiating charges( Available b# acce(tance ,n such letter o" credit+ usance $ill o" e9change. dra"t is drawn on the no%inated. issuing $ank and the dra"t is accepted and pay%ent is %ade on due date( Available b# sig)t (a#ment ,n such situations+ the pay%ent is a!aila$le at sight that is on de%andJ howe!er re*uired docu%ents are re*uired to $e su$%itted( Available b# de%erred (a#ments Nor%ally the ter%s o" a docu%entary credit will include an instruction to the $ene"iciary to draw $ills o" e9change+ and issuing $ank will guarantee that such $ills will $e honored+ pro!ided all the other ter%s o" the credit are %et( 1owe!er+ in de"erred pay%ent credits+ there is no need "or the e9porter to draw a $ill o" e9change( #he issuing $ank si%ply undertakes that pay%ent will $e %ade on a "i9ed or deter%ina$le "uture date+ pro!ided the other conditions ha!e $een "ul"illed( 4lthough the e9porter does not draw a $ill o" e9change+ in all respects these credits are identical to other docu%entary credits and so%e $anks+ in practice+ will negotiate the docu%ents pro!iding they are entirely satis"ied with the standing o" the issuing $ank( =ne $ene"it o" de"erred credits is that they a!oid the need "or pay%ent o" sta%p duty on $ills o" e9change( 4ll credits %ust clearly indicate whether they are a!aila$le $y sight pay%ent+ $y acceptance or $y de"erred pay%ent( C)aracteristics o% Negotiabilit# and Revocabilit# EB(lained: Negotiabilit# Letters o" credit are usually negotia$le( #he issuing $ank is o$ligated to pay not only the $ene"iciary+ $ut also any $ank no%inated $y the $ene"iciary( Negotia$le instru%ents are passed "reely "ro% one party to another al%ost in the sa%e way as %oney( #o $e negotia$le+ the letter o" credit %ust include an unconditional pro%ise to pay+ on de%and or at a de"inite ti%e( #he no%inated $ank $eco%es a holder in due course( 4s a holder in due course+ the holder takes the letter o" credit "or !alue+ in good "aith+ without notice o" any clai%s against it( 4 holder in due course is treated "a!ora$ly under the CC( #he transaction is considered a straight negotiation i" the issuing $ankHs pay%ent o$ligation e9tends only to the $ene"iciary o" the credit( ," a letter o" credit is a straight negotiation it is re"erenced on its "ace $y Mwe engage with youM or Ma!aila$le with oursel!esM( nder these conditions the pro%ise does not pass to a purchaser o" the dra"t as a holder in due course( Revocabilit# Letters o" credit %ay $e either re!oca$le or irre!oca$le( 4 re!oca$le letter o" credit %ay $e re!oked or %odi"ied "or any reason+ at any ti%e $y the issuing $ank without noti"ication( 4 re!oca$le letter o" credit cannot $e con"ir%ed( ," a correspondent $ank is engaged in a transaction that in!ol!es a re!oca$le letter o" credit+ it ser!es as the ad!ising $ank( =nce the docu%ents ha!e $een presented and %eet the ter%s and conditions in the letter o" credit+ and the dra"t is honored+ the letter o" credit cannot $e re!oked( #he re!oca$le letter o" credit is not a co%%only used instru%ent( ,t is generally used to pro!ide guidelines "or ship%ent( ," a letter o" credit is re!oca$le it would $e re"erenced on its "ace( #he irre!oca$le letter o" credit %ay not $e re!oked or a%ended without the agree%ent o" the issuing $ank+ the con"ir%ing $ank+ and the $ene"iciary( 4n irre!oca$le letter o" credit "ro% the issuing $ank insures the $ene"iciary that i" the re*uired docu%ents are presented and the ter%s and conditions are co%plied with+ pay%ent will $e %ade( ," a letter o" credit is irre!oca$le it is re"erenced on its "ace( 200 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 T#(es o% 7ocumentar# Credits: ;e!oca$le Letter o" Credit ,rre!oca$le Letter o" Credit ,rre!oca$le Con"ir%ed Letter o" Credit ;e!ol!ing Credit #rans"era$le Letter o" Credit ;ed Clause or Packing Credit :tand $y Credit
VU
Revocable letter o% credit 4 re!oca$le letter o" credit %ay $e cancelled or %odi"ied a"ter its date o" issue+ $y the issuing $ank( 4ccording to CP-600+ credit shall $e irre!oca$le( ?rrevocable letter o% credit 4n irre!oca$le letter o" credit can neither $e a%ended nor cancelled without the agree%ent o" all parties to the credit( nder CPB00 all letters o" credit are dee%ed to $e irre!oca$le unless otherwise stated( 1ere+ the i%porterHs $ank gi!es a $inding undertaking to the supplier pro!ided all the ter%s and conditions o" the credit are "ul"illed( Con%irmed letter o% credit 4 con"ir%ed letter o" credit is one in which the ad!ising $ank+ on the instructions o" the issuing $ank+ has added a con"ir%ation that pay%ent will $e %ade as long as co%pliant docu%ents are presented( #his co%%it%ent holds e!en i" the issuing $ank or the $uyer "ails to %ake pay%ent( #he added security to the e9porter o" con"ir%ation needs to $e considered in the conte9t o" the standing o" the issuing $ank and the current political and econo%ic state o" the i%porterHs country( 4 $ank will %ake an additional charge "or con"ir%ing a letter o" credit( ,n %any cases+ the con"ir%ing $ank is located in Bene"iciaryEs country Con"ir%ation costs will !ary according to the country in!ol!ed+ $ut "or %any countries considered a high risk will $e $etween @Y-CY( #here also %ay $e countries issuing letters o" credit+ which $anks do not wish to+ con"ir% - they %ay already ha!e enough e9posure in that %arket or not wish to e9pose the%sel!es to that particular risk at all( 2e s)all continue 'it) t)e remaining t#(es o% letter o% credit
201
Banking Laws and Practices-BNK 601 4ETTER O" CRE7?T T#(es o% 7ocumentar# Credits: T)ere are %ollo'ing t#(es o% 4etter o% credit: C !C *C 1C 0C .C 5C ;e!oca$le Letter o" Credit ,rre!oca$le Letter o" Credit ,rre!oca$le Con"ir%ed Letter o" Credit ;e!ol!ing Credit #rans"era$le Letter o" Credit ;ed Clause or Packing Credit :tand $y Credit
VU LESSON 34
2e )ave alread# eB(lained %irst t)ree t#(es, rest o% t)e t#(es are eB(lained in %ollo'ing (aragra()s: Revolving 4etter o% Credit #he re!ol!ing credit is used "or regular ship%ents o" the sa%e co%%odity to the sa%e i%porter( ,t can re!ol!e in relation to ti%e or !alue( ," the credit is ti%e re!ol!ing once utili2ed it is re-instated "or "urther regular ship%ents until the credit is "ully drawn( ," the credit re!ol!es in relation to !alue once utili2ed and paid the !alue can $e reinstated "or "urther drawings( #he credit %ust state that it is a re!ol!ing letter o" credit and it %ay re!ol!e either auto%atically or su$Dect to certain pro!isions( ;e!ol!ing letters o" credit are use"ul to a!oid the need "or repetitious arrange%ents "or opening or a%ending letters o" credit( Trans%erable 4etter o% Credit 4 trans"era$le letter o" credit is one in which the e9porter has the right to re*uest the paying+ or negotiating $ank to %ake either part+ or all+ o" the credit !alue a!aila$le to one or %ore third parties( #his type o" credit is use"ul "or those acting as %iddle%en especially where there is a need to "inance purchases "ro% third party suppliers( Red Clause letter o% credit/ Letter o" credit allowing an initial ad!ance to the $ene"iciary $e"ore ship%ent o" the goods( ,n the days o" #ele9+ this clause in the Letter o" Credit was printed in red ink( Standb# 4etters o% Credit 4 stand$y letter o" credit is used as support where an alternati!e+ less secure+ %ethod o" pay%ent has $een agreed( #hey are also used in the nited :tates o" 4%erica in place o" $ank guarantees( :hould the e9porter "ail to recei!e pay%ent "ro% the i%porter he %ay clai% under the stand$y letter o" creditR Certain docu%ents are likely to $e re*uired to o$tain pay%ent including& the stand$y letter o" credit itsel"J a sight dra"t "or the a%ount dueJ a copy o" the unpaid in!oiceJ proo" o" dispatch and a signed declaration "ro% the $ene"iciary stating that pay%ent has not $een recei!ed $y the due date and there"ore rei%$urse%ent is clai%ed $y letter o" credit( #he ,nternational Cha%$er o" Co%%erce pu$lishes rules "or operating stand$y letters o" credit - ,:P5C ,nternational :tand$y Practices( &ac$+to+&ac$ 4etter o% Credit 4 $ack-to-$ack letter o" credit can $e used as an alternati!e to the trans"era$le letter o" credit( ;ather than trans"erring the original letter o" credit to the supplier+ once the letter o" credit is recei!ed $y the e9porter "ro% the opening $ank+ that letter o" credit is used as security to esta$lish a second letter o" credit drawn on the e9porter in "a!or o" his i%porter( -any $anks are reluctant to issue $ack-to-$ack letters o" credit due to the le!el o" risk to which they are e9posed+ whereas a trans"era$le credit will not e9pose the% to higher risk than under the original credit( /rocedure %or ?ssuing a 4etter o% Credit T)e (rocedure %or issuing a letter o% credit is outlined and eB(lained )ereunder: 202 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU L(C 4pplication /or% ,ndent Per"or%a in!oice.Purchase =rder ,nsurance co!er note .-arine insurance policy /i9ation o" %argin 3depending on credit worthiness o" applicant 0 :BP instructions regarding %argin re*uire%ents8 Credit report o" e9porter /orward e9change $ooking 3at re*uest o" i%porter8 :election o" "oreign correspondent.4d!ising $ank( #rans%ission o" letter o" credit( #he applicant would "ill out an application detailing the "ollowing in"or%ation& Na%e and address o" $ene"iciary 4%ount "or which L.C is to $e opened -ode o" a!aila$ility o" the credit Na%e o" the drawee o" $ill o" e9change 'escription o" goods docu%ents re*uired to $e su$%itted $y $ene"iciary "or seeking pay%ent. negotiation( -entioning port o" ship%ent and port o" discharge o" goods( #er%s o" pay%ent o" "reight ,nstructions regarding trans ship%ent or partial ship%ent Last date "or ship%ent #he date and place o" e9piry #he $ank would scrutini2ed the application and a"ter %eeting all re*uisites conditions and taking necessary %easures to sa"e guard the risk e9posure o" the $ank+ the $ank would issue letter o" credit( ?nland 4etter o% Credit Procedure "or inland letter o" credit is sa%e as "or international letter o" credit( ,nland letter o" credit is opened in Pak rupees and ad!ised through local $ranch o" issuing $ank( Standard "orms o% 7ocumentation <hen %aking pay%ent "or product on $ehal" o" its custo%er+ the issuing $ank %ust !eri"y that all docu%ents and dra"ts con"or% precisely to the ter%s and conditions o" the letter o" credit( #he di""erent types o" docu%ents re*uired under letter o" credit are outlined and e9plained $elow& Co%%ercial ,n!oice Bill o" lading <arrantee o" title Letter o" inde%nity &ommercial nvoice #he $illing "or the goods and ser!ices( ,t includes a description o" %erchandise+ price+ /=B origin+ and na%e and address o" $uyer and seller( #he $uyer and seller in"or%ation %ust correspond e9actly to the description in the letter o" credit( nless the letter o" credit speci"ically states otherwise+ a generic description o" the %erchandise is usually accepta$le in the other acco%panying docu%ents( &ill o% 4ading 4 docu%ent e!idencing the receipt o" goods "or ship%ent and issued $y a "reight carrier engaged in the $usiness o" "orwarding or transporting goods( #he docu%ents e!idence control o" goods( #hey also ser!e as a receipt "or the %erchandise shipped and as e!idence o" the carrierHs o$ligation to transport the goods to their proper destination(
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2arrant# o% Title 4 warranty gi!en $y a seller to a $uyer o" goods that states that the title $eing con!eyed is good and that the trans"er is right"ul( #his is a %ethod o" certi"ying clear title to product trans"er( ,t is generally issued to the purchaser and issuing $ank e9pressing an agree%ent to inde%ni"y and hold $oth parties har%less( 4etter o% ?ndemnit# :peci"ically inde%ni"ies the purchaser against a certain stated circu%stance( ,nde%ni"ication is generally used to guaranty that shipping docu%ents will $e pro!ided in good order when a!aila$le( Common 7e%ects in 7ocumentation 4$out hal" o" all drawings presented contain discrepancies( 4 discrepancy is an irregularity in the docu%ents that causes the% to $e in non-co%pliance to the letter o" credit( ;e*uire%ents set "orth in the letter o" credit cannot $e wai!ed or altered $y the issuing $ank without the e9press consent o" the custo%er( #he $ene"iciary should prepare and e9a%ine all docu%ents care"ully $e"ore presentation to the paying $ank to a!oid any delay in receipt o" pay%ent( Co%%only "ound discrepancies $etween the letter o" credit and supporting docu%ents include& Letter o" Credit has e9pired prior to presentation o" dra"t( Bill o" Lading e!idences deli!ery prior to or a"ter the date range stated in the credit( :tale dated docu%ents( Changes included in the in!oice not authori2ed in the credit( ,nconsistent description o" goods( ,nsurance docu%ent errors( ,n!oice a%ount not e*ual to dra"t a%ount( Ports o" loading and destination not as speci"ied in the credit( 'escription o" %erchandise is not as stated in credit( 4 docu%ent re*uired $y the credit is not presented( 'ocu%ents are inconsistent as to general in"or%ation such as !olu%e+ *uality+ etc( Na%es o" docu%ents not e9act as descri$ed in the credit( Bene"iciary in"or%ation %ust $e e9act( ,n!oice or state%ent is not signed as stipulated in the letter o" credit( <hen a discrepancy is detected $y the negotiating $ank+ a correction to the docu%ent %ay $e allowed i" it can $e done *uickly while re%aining in the control o" the $ank( ," ti%e is not a "actor+ the e9porter should re*uest that the negotiating $ank return the docu%ents "or corrections( ," there is not enough ti%e to %ake corrections+ the e9porter should re*uest that the negotiating $ank send the docu%ents to the issuing $ank on an appro!al $asis or noti"y the issuing $ank $y wire+ outline the discrepancies+ and re*uest authority to pay( Pay%ent cannot $e %ade until all parties ha!e agreed to Dointly wai!e the discrepancy( Commonsense Rules "or ?m(orter ;bu#er< #he instructions to the issuing $ank %ust $e clear+ correct and precise( #he ter%s and conditions and docu%ents called "or should $e in agree%ent with the contract o" sales( 4ny e9a%ination.inspection o" goods prior to ship%ent or at the e!idenced $y a docu%ent( #he issuer o" such inspection docu%ent %ust $e stated in the credit( #he credit should not call "or the docu%ents which the seller can not pro!ide+ nor set out conditions that he can not %eet( Commonsense Rules "or EB(orter ;seller< Co%%unicate with your custo%ers in detail $e"ore they apply "or letters o" credit( Consider whether a con"ir%ed letter o" credit is needed( 204 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU pon "irst ad!ice o" the letter o" credit+ check that all its ter%s and conditions can $e co%plied with within the prescri$ed ti%e li%its( 1e should study the credit in depth and re*uest the changes at the earliest+ i" dee%ed necessary( -any presentations o" docu%ents run into pro$le%s with ti%e-li%its( Iou %ust $e aware o" at least three ti%e constraints - the e9piration date o" the credit+ the latest shipping date and the %a9i%u% ti%e allowed $etween dispatch and presentation( 4"ter dispatch o" the goods+ check all the docu%ents $oth against the ter%s o" the credit and against each other "or internal consistency( Advantages E /roblems9 Ris$s in letter o% credit: Advantages o% 4etter o% Credit: C >eneral glo$al accepta$ility $y the interacting parties !C #he $ene"iciary is assured o" pay%ent as long as it co%plies with the ter%s and conditions o" the letter o" credit( #he letter o" credit identi"ies which docu%ents %ust $e presented and the data content o" those docu%ents( #he credit risk is trans"erred "ro% the applicant to the issuing $ank( *C #he $ene"iciary can enDoy the ad!antage o" %itigating the issuing $ankEs country risk $y re*uiring that a $ank in its own country con"ir% the letter o" credit( #hat $ank then takes on the country and co%%ercial risk o" the issuing $ank and protects the $ene"iciary( 1C #he $ene"iciary %ini%i2es collection ti%e as the letter o" credit accelerates pay%ent o" the recei!a$les( 0C #he $ene"iciaryEs "oreign e9change risk is eli%inated with a letter o" credit issued in the currency o" the $ene"iciaryEs country( Ris$s involved in 4etter o% CreditC C :ince all the parties in!ol!ed in Letter o" Credit deal with the docu%ents and not with the goods+ the risk o" Bene"iciary not shipping goods as %entioned in the LC is still persists( !C #he Letter o" Credit as a pay%ent %ethod is costlier than other %ethods o" pay%ent such as =pen 4ccount or Collection *C #he Bene"iciaryEs docu%ents %ust co%ply with the ter%s and conditions o" the Letter o" Credit "or ,ssuing Bank to %ake the pay%ent( 1C #he Bene"iciary is e9posed to the Co%%ercial risk on ,ssuing Bank+ Political risk on the ,ssuing BankEs country and /oreign )9change ;isk in case o" sance Letter o" Credits( Ao' t)e eB(orter can minimiHe t)e (roblems9 ris$ o #he e9porter can %ini%i2e the risk o" low rating o" the issuing $ank or country risk $y insisting "or issuance o" a con"ir%ed letter o" credit Course o% action ')en an eB(orter )as (resented documents ')ic) do not con%orm to t)e credit: o )9porter %ay ask the ad!ising $ank to send docu%ents to issuing $ank on collection $asis( o )9porter can ask the negotiating $ank to negotiate the discrepant docu%ents against inde%nity or guarantee o" the e9porter( o #he ad!ising $ank can approach the issuing $ank "or wai!er o" discrepancies(
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+low &hart of #etter of &redit
<e shall continue with e9planation o" "low chart
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Banking Laws and Practices-BNK 601 "4O2 CAART O" 4ETTER O" CRE7?TDREV?S?TE7
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EB(lanation o% "lo' c)art: C /irst o" all i%porter and e9porter enter into a contract( !C 4pplicant 3,%porter8 approaches the $ank *C ,%porterEs $ank issues L.C and ad!ises it to the ad!ising $ank( 1C 4d!ising $ank ad!ises L.C to the e9porter 0C 4"ter ship%ent o" the consign%ent+ e9porter su$%its docu%ent to issuing $ank "or pay%ent through ad!ising $ank( 3#he e9porter %ay also adopt other %easures "or o" pay%ent such as negotiation o" docu%ents through negotiating $ank( .C 4d!ising $ank sends docu%ents to issuing $ank 5C ,ssuing $ank shall de$it account o" i%porter under ad!ice to hi% and trans%it proceeds to ad!ising $ank( 6C 4d!ising $ank shall credit account o" e9porter( -C #he ad!ising $ank shall inti%ate the e9porter. custo%er and send credit ad!ice to hi%( Settlements under a 4etter o% Credit 4ll co%%ercial letters o" credit %ust clearly indicate whether they are paya$le $y sight pay%ent+ $y de"erred pay%ent+ $y acceptance+ or $y negotiation( #hese are noted as "or%al de%ands under the ter%s o" the co%%ercial letter o" credit( ,n a sig)t (a#ment+ the co%%ercial letter o" credit is paya$le when the $ene"iciary presents the co%plying docu%ents and i" the presentation takes place on or $e"ore the e9piration o" the co%%ercial letter o" credit( ,n a de%erred (a#ment+ the co%%ercial letter o" credit is paya$le on a speci"ied "uture date( #he $ene"iciary %ay present the co%plying docu%ents at an earlier date+ $ut the co%%ercial letter o" credit is paya$le only on the speci"ied "uture date( Copyright Virtual ni!ersity o" Pakistan 207
Banking Laws and Practices-BNK 601 VU 4n acce(tance is a ti%e dra"t drawn on+ and accepted $y+ a $anking institution+ which pro%ises to honor the dra"t at a speci"ied "uture date( #he act o" acceptance is without recourse as it is a co%%it%ent to pay the "ace a%ount o" the accepted dra"t( nder negotiation+ the negotiating ban$+ a third party negotiator+ e9pedites pay%ent to the $ene"iciary upon the $ene"iciaryEs presentation o" the co%plying docu%ents to the negotiating $ank( #he $ank pays the $ene"iciary+ nor%ally at a discount o" the "ace a%ount o" the !alue o" the docu%ents+ and then presents the co%plying docu%ents+ including a sight or ti%e dra"t+ to the issuing $ank to recei!e "ull pay%ent at sight or at a speci"ied "uture date( Reimbursement under a 4etter o% Credit:
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Uni%orm Rules %or &an$+to+&an$ Reimbursements under 7ocumentar# Credits, ?CC /ublication NoC 0!0 Banking Laws and Practices-BNK 601 VU GENERA4 /ROV?S?ON AN7 7E"?N?T?ON Article - 4pplication o" ;; #he ni"or% ;ules "or Bank-to-Bank ;ei%$urse%ents under 'ocu%entary Credits 3M;ulesM8+ ,CC Pu$lication No( B@B+ shall apply to all Bank-to-Bank ;ei%$urse%ents where they are incorporated into the te9t o" the ;ei%$urse%ent 4uthori2ation( #hey are $inding on all parties thereto+ unless otherwise e9pressly stipulated in the ;ei%$urse%ent 4uthori2ation( #he ,ssuing Bank is responsi$le "or indicating in the 'ocu%entary Credit 3MCreditM8 that ;ei%$urse%ent Clai%s are su$Dect to these ;ules( ,n a Bank-to-Bank ;ei%$urse%ent su$Dect to these ;ules+ the ;ei%$ursing Bank acts on the instructions and.or under the authority o" the ,ssuing Bank( #hese ;ules are not intended to o!erride or change the pro!isions o" the ,CC ni"or% Custo%s and Practice "or 'ocu%entary Credits( Article ! - 'e"initions 4s used in these ;ules+ the "ollowing ter%s shall ha!e the %eanings speci"ied in this 4rticle and %ay $e used in the singular or plural as appropriate & a( M,ssuing BankM shall %ean the $ank that has issued a Credit and the ;ei%$urse%ent 4uthori2ation under that Credit( $( M;ei%$ursing BankM shall %ean the $ank instructed and.or authori2ed to pro!ide rei%$urse%ent pursuant to a ;ei%$urse%ent 4uthori2ation issued $y the ,ssuing Bank( c( M;ei%$urse%ent 4uthori2ationsM shall %ean an instruction and.or authori2ation independent o" the Credit+ issued $y an ,ssuing Bank to a ;ei%$ursing Bank to rei%$urse a Clai%ing Bank+ or+ i" so re*uested $y the ,ssuing Bank+ to accept and pay a ti%e dra"t3s8 drawn on the ;ei%$ursing Bank( d( M;ei%$urse%ent 4%end%entM shall %ean an ad!ice "ro% the ,ssuing Bank to a ;ei%$ursing Bank stating changes to a ;ei%$urse%ent 4uthori2ation( e( MClai%ing BankM shall %ean a $ank that pays+ incurs a de"erred pay%ent undertaking+ accepts dra"t3s8+ or negotiates under a Credit and presents a ;ei%$urse%ent Clai% to the ;ei%$ursing Bank( MClai%ing BankM shall include a $ank authori2ed to present a ;ei%$urse%ent Clai% to the ;ei%$ursing Bank on $ehal" o" the $ank that pays+ incurs a de"erred pay%ent undertaking+ accepts dra"t3s8+ or negotiates "( M;ei%$urse%ent Clai%M shall %ean a re*uest "or rei%$urse%ent "ro% the Clai%ing Bank to the ;ei%$ursing Bank( g( M;ei%$urse%ent ndertakingM shall %ean a separate irre!oca$le undertaking o" the ;ei%$ursing Bank+ issued upon the authori2ation or re*uest o" the ,ssuing Bank+ to the Clai%ing Bank na%ed in the ;ei%$urse%ent 4uthori2ation+ to honor that $ankHs ;ei%$urse%ent Clai% pro!ided the ter%s and conditions o" the ;ei%$urse%ent ndertaking ha!e $een co%plied with( h( M;ei%$urse%ent ndertaking 4%end%entM shall %ean an ad!ice "ro% the ;ei%$ursing Bank to the Clai%ing Bank na%ed in the ;ei%$urse%ent 4uthori2ation+ stating changes to a ;ei%$urse%ent ndertaking( i( /or the purposes o" these ;ules $ranches o" a $ank in di""erent countries are considered separate $anks( Article * - ;ei%$urse%ent 4uthori2ation Versus Credits 4 ;ei%$urse%ent 4uthori2ation is separate "ro% the Credit to which it re"ers+ and a ;ei%$ursing Bank is not concerned with or $ound $y the ter%s and conditions o" the Credit+ e!en i" any re"erence whatsoe!er to the ter%s and conditions o" the Credit is included in the ;ei%$urse%ent 4uthori2ation( &C 4?A&?4?T?ES AN7 RES/ONS?&?4?T?ES Article 1 - 1onor o" a ;ei%$urse%ent Copyright Clai% Virtual ni!ersity o" Pakistan )9cept as pro!ided $y the ter%s o" its ;ei%$urse%ent ndertaking a ;ei%$ursing Bank is not o$ligated to honor a ;ei%$urse%ent Clai%( Article 0 - ;esponsi$ilities o" the ,ssuing Bank
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Banking Laws and Practices-BNK 601 VU #here are co%plete set o" rules under ;; B@B 3uni"or% rules "or $ank to $ank rei%$urse%ent under letter o" credit8( #hese rules "or inter$ank rei%$urse%ents as contained in URR 0!0 are gi!en hereunder& 4etters o% Credit ++ a Solution to Man# Trade "inance Needs Letters o" credit are tools to aid i%porters to le!erage their capital $ase and their a$ility to capture %ore trading opportunities( 4 Letter o" Credit allows i%porters.$uyers to o""er secure ter%s o" pay%ent to e9porters.sellers in which a $ank 3or %ore than one $ank8 gets in!ol!ed( #he technical ter% "or Letter o" credit is H'ocu%entary Letter o" CreditH( Letters o" Credit 3LCHs8 deal in docu%ents+ not goods( #he idea in an international trade transaction is to shi"t the risk "ro% the actual $uyer to a $ank( #hus an LC is a pay%ent undertaking gi!en $y a $ank to the Bene"iciary 3the seller8 and is issued on $ehal" o" the applicant 3the $uyer8( #he Bank that issues the LC is re"erred to as the ,ssuing Bank+ generally in the country o" the Buyer( #he Bank that 4d!ises the LC to the seller is called the 4d!ising Bank which is generally in the country o" the seller( #he speci"ied $ank %akes the pay%ent upon the success"ul presentation o" the re*uired docu%ents $y the seller within the speci"ied ti%e "ra%e( Note that the Bank scrutini2es the Hdocu%entsH and not the HgoodsH "or %aking pay%ent( #his process gi!es $oth the $uyer and the seller co%"ort that the trans"er o" ownership to the goods will occur properly and when pay%ent is secure( #he seller gets assured that i" docu%ents are presented on ti%e and in the way that they ha!e $een re*uested on the LC the pay%ent will $e %ade( #he $uyer is assured that the $ank will thoroughly e9a%ine these presented docu%ents and ensure that they %eet the ter%s and conditions stipulated in the LC( 'ocu%ents re*uested in a Letter o" Credit would o"ten include& a co%%ercial in!oiceJ a transport docu%ent such as a Bill o" lading or 4irway $illJ an insurance docu%entJ an inspection certi"icateJ and.or a certi"icate o" origin( =ther docu%ents could $e re*uired+ depending on the underlying transaction( Keep in %ind that the Letter o" Credit process re!ol!es around docu%ents+ not goods( #he LC could $e Hirre!oca$leH or Hre!oca$leH( 4n irre!oca$le LC cannot $e changed unless $oth the $uyer and seller agree( <hereas in a re!oca$le LC changes to the LC can $e %ade without the consent o" the $ene"iciary( 4 HsightH LC %eans that pay%ent is %ade i%%ediately to the $ene"iciary.seller.e9porter upon presentation o" the correct docu%ents in the re*uired ti%e "ra%e( 4 Hti%eH or HdateH LC will speci"y when pay%ent will $e %ade at a "uture date and upon presentation o" the re*uired docu%ents( 4 letter o" credit can %ake a $ig di""erence to an i%porter( -any international deals Dust canHt happen without a letter o" credit( 4nd when you cut through all the %u%$o-Du%$o(((((((this is a tool that allows $uyers and sellers to do $usiness with greater con"idence( Uni%orm Customs and /ractice %or 7ocumentar# Credits ;UC/ .88< ,nternational Cha%$er o" Co%%erce 3,CC8+ is a <orld Business =rgani2ation+ its head*uarters are $ased at Paris+ it has de!eloped and designed standards+ rules and re"erence guides "or international trade( CP 600 is also designed $y ,CC and the rules contained in therein go!ern letter o" credit transactions worldwide( CP 600 $eca%e e""ecti!e "ro% 1st Auly @006 CP 600 is co%prised o" ?5 4rticles( #hese are a co%prehensi!e and practical working aid to $ankers+ lawyers+ i%porters+ and e9porters+ transport e9ecuti!es+ educators+ and all others who are engaged and interested in letter o" credit transactions( 2e s)all discuss some o% t)e im(ortant (rovisions o% UC/ .88 in t)e neBt 4essonC
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LESSON 36 UN?"ORM CUSTOMS AN7 /RACT?CE "OR 7OCUMENTAR= CRE7?TS ;UC/ .88< ,nternational Cha%$er o" Co%%erce 3,CC8+ is a <orld Business =rgani2ation+ its head*uarters are $ased at Paris+ it has de!eloped and designed standards+ rules and re"erence guides "or international trade( CP 600 is also designed $y ,CC and the rules contained therein go!ern letter o" credit transactions worldwide( CP 600 $eca%e e""ecti!e "ro% 1st Auly @006 CP 600 is co%prised o" ?5 4rticles( #hese are a co%prehensi!e and practical working aid to $ankers+ lawyers+ i%porters+ and e9porters+ transport e9ecuti!es+ educators+ and all others who are engaged and interested in letter o" credit transactions(
Some o% t)e im(ortant Articles o% UC/ .88 Article #he ni"or% Custo%s and Practice "or 'ocu%entary Credits+ @006 ;e!ision+ ,CC Pu$lication no( 600 3M CPF8 are rules that apply to any docu%entary credit 3McreditM8 3including+ to the e9tent to which they %ay $e applica$le+ any stand$y letter o" credit8 when the te9t o" the credit e9pressly indicates that it is su$Dect to these rules( #hey are binding on all (arties thereto unless e9pressly %odi"ied or e9cluded $y the credit( Article ! ?t com(rises de%initions o% certain eB(ressions ')ic) are given belo': Advising ban$: %eans the $ank that ad!ises the credit at the re*uest o" the issuing $ank( A((licant: %eans the party on whose re*uest the credit is issued( &an$ing da#: %eans a day on which a $ank is regularly open at the place at which an act su$Dect to these rules is to $e per"or%ed &ene%iciar#: %eans the party in whose "a!or a credit is issued( Com(l#ing (resentation: %eans a presentation that is in accordance with the ter%s and conditions o" the credit+ the applica$le pro!isions o" these rules and international standard $anking practice( Con%irmation: %eans a de"inite undertaking o" the con"ir%ing $ank+ in addition to that o" the issuing $ank+ to honor or negotiate a co%plying presentation( Con%irming ban$& %eans the $ank that adds its con"ir%ation to a credit upon the issuing $ankKs authori2ation or re*uest( Credit: %eans any arrange%ent+ howe!er na%ed or descri$ed+ that is irre!oca$le and there$y constitutes a de"inite undertaking o" the issuing $ank to honor a co%plying presentation( Aonour means: #o pay at sight i" the credit is a!aila$le $y sight pay%ent #o incur a de"erred pay%ent undertaking and pay at %aturity i" the credit is a!aila$le $y de"erred pay%ent #o accept a $ill o" e9change 3Mdra"tM8 drawn $y the $ene"iciary and pay at %aturity i" the credit is a!aila$le $y acceptance ?ssuing ban$: %eans the $ank that issues a credit at the re*uest o" an applicant or on its own $ehal"( Copyright Virtual ni!ersity o" Pakistan 211
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Negotiation: %eans the purchase $y the no%inated $ank o" dra"ts 3drawn on a $ank other than the no%inated $ank8 and.or docu%ents under a co%plying presentation+ $y ad!ancing or agreeing to ad!ance "unds to the $ene"iciary on or $e"ore the $anking day on which rei%$urse%ent is due to the no%inated $ank( Nominated &an$: %eans the $ank with which the credit is a!aila$le or any $ank in the case o" a credit a!aila$le with any $ank( /resentation: %eans either the deli!ery o" docu%ents under a credit to the issuing $ank or no%inated $ank or the docu%ents so deli!ered( /resenter& %eans a $ene"iciary+ $ank or other party that %akes a presentation( Article * 4 credit is irrevocable e!en i" there is no indication to that e""ect( 4 docu%ent %ay $e signed $y handwriting+ "acsi%ile signature+ per"orated signature+ sta%p+ sy%$ol or any other %echanical or electronic %ethod o" authentication( Article 1 Credits vC Contracts 4 credit $y its nature is a separate transaction "ro% the sale or other contract on which it %ay $e $ased( Banks are in no way concerned with or $ound $y such contract+ e!en i" any re"erence whatsoe!er to it is included in the credit( Conse*uently+ the undertaking o" a $ank to honor+ to negotiate or to "ul"ill any other o$ligation under the credit is not su$Dect to clai%s or de"enses $y the applicant resulting "ro% its relationships with the issuing $ank or the $ene"iciary( 4 $ene"iciary can in no case a!ail itsel" o" the contractual relationships e9isting $etween $anks or $etween the applicant and the issuing $ank( 4n issuing $ank should discourage any atte%pt $y the applicant to include+ as an integral part o" the credit+ copies o" the underlying contract+ Per"or%a in!oice and the like( Article 0 7ocuments vC Goods, Services or /er%ormance Banks deal with docu%ents and not with goods+ ser!ices or per"or%ance to which the docu%ents %ay relate( Article 5 ?ssuing &an$ Underta$ing Pro!ided that the stipulated docu%ents are presented to the no%inated $ank or to the issuing $ank and that they constitute a co%plying presentation+ the issuing $ank %ust honor i" the credit is a!aila$le $y& iC :ight pay%ent+ de"erred pay%ent or acceptance with the issuing $ankJ iiC :ight pay%ent with a no%inated $ank and that no%inated $ank does not payJ iiiC 'e"erred pay%ent with a no%inated $ank and that no%inated $ank does not incur its de"erred pay%ent undertaking or+ ha!ing incurred its de"erred pay%ent undertaking+ does not pay at %aturityJ ivC 4cceptance with a no%inated $ank and that no%inated $ank does not accept a dra"t drawn on it or+ ha!ing accepted a dra"t drawn on it+ does not pay at %aturityJ vC Negotiation with a no%inated $ank and that no%inated $ank does not negotiate( viC 4n issuing $ank is irre!oca$ly $ound to honor as o" the ti%e it issues the credit( 4n issuing $ank undertakes to rei%$urse a no%inated $ank that has honored or negotiated a co%plying presentation and "orwarded the docu%ents to the issuing $ank( ;ei%$urse%ent "or the a%ount o" a co%plying presentation under a credit a!aila$le $y acceptance or de"erred pay%ent is due at %aturity+ whether or not the no%inated $ank prepaid or purchased $e"ore %aturity( 212 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU 4n issuing $ankHs undertaking to rei%$urse a no%inated $ank is independent o" the issuing $ankHs undertaking to the $ene"iciary( Article 6 Con%irming &an$ Underta$ing Pro!ided that the stipulated docu%ents are presented to the con"ir%ing $ank or to any other no%inated $ank and that they constitute a co%plying presentation+ the con"ir%ing $ank %ust& iC 1onor+ i" the credit is a!aila$le $y aC :ight pay%ent+ de"erred pay%ent or acceptance with the con"ir%ing $ankJ bC :ight pay%ent with another no%inated $ank and that no%inated $ank does not payJ cC 'e"erred pay%ent with another no%inated $ank and that no%inated $ank does not incur its de"erred pay%ent undertaking or+ ha!ing incurred its de"erred pay%ent undertaking+ does not pay at %aturityJ dC 4cceptance with another no%inated $ank and that no%inated $ank does not accept a dra"t drawn on it or+ ha!ing accepted a dra"t drawn on it+ does not pay at %aturityJ eC Negotiation with another no%inated $ank and that no%inated $ank does not negotiate( iiC Negotiate+ without recourse+ i" the credit is a!aila$le $y negotiation with the con"ir%ing $ank( iiiC 4 con"ir%ing $ank is irre!oca$ly $ound to honor or negotiate as o" the ti%e it adds its con"ir%ation to the credit( 4 con"ir%ing $ank undertakes to rei%$urse another no%inated $ank that has honored or negotiated a co%plying presentation and "orwarded the docu%ents to the con"ir%ing $ank( ;ei%$urse%ent "or the a%ount o" a co%plying presentation under a credit a!aila$le $y acceptance or de"erred pay%ent is due at %aturity+ whether or not another no%inated $ank prepaid or purchased $e"ore %aturity( 4 con"ir%ing $ankHs undertaking to rei%$urse another no%inated $ank is independent o" the con"ir%ing $ankKs undertaking to the $ene"iciary( Con%irming &an$ Underta$ing ," a $ank is authori2ed or re*uested $y the issuing $ank to con"ir% a credit $ut is not prepared to do so+ it %ust in"or% the issuing $ank without delay and %ay ad!ise the credit without con"ir%ation( UC/ .88 + Article Tele+transmitted and /re+Advised Credits and Amendments 4n authenticated tele-trans%ission o" a credit or a%end%ent will $e dee%ed to $e the operati!e credit or a%end%ent+ and any su$se*uent %ail con"ir%ation shall $e disregarded( ," a tele-trans%ission states M"ull details to "ollowM 3or words o" si%ilar e""ect8+ or states that the %ail con"ir%ation is to $e the operati!e credit or a%end%ent+ and then the tele-trans%ission will not $e dee%ed to $e the operati!e credit or a%end%ent( #he issuing $ank %ust then issue the operati!e credit or a%end%ent without delay in ter%s not inconsistent with the tele-trans%ission( 4 preli%inary ad!ice o" the issuance o" a credit or a%end%ent 3Mpre-ad!iceM8 shall only $e sent i" the issuing $ank is prepared to issue the operati!e credit or a%end%ent( 4n issuing $ank that sends a pre ad!ice is irre!oca$ly co%%itted to issue the operati!e credit or a%end%ent+ without delay+ in ter%s not inconsistent with the pre-ad!ice( Article 1 Standard %or EBamination o% 7ocuments No%inated $ank acting on its no%ination+ a con"ir%ing $ank+ i" any+ and the issuing $ank %ust e9a%ine a presentation to deter%ine+ on the $asis o" the docu%ents alone+ whether or not the docu%ents appear on their "ace to constitute a co%plying presentation( No%inated $ank acting on its no%ination+ a con"ir%ing $ank+ i" any+ and the issuing $ank shall each ha!e a %a9i%u% o" "i!e $anking days "ollowing the day o" presentation to deter%ine i" a presentation is co%plying( #his period is not curtailed or otherwise a""ected $y the occurrence on or a"ter the date o" presentation o" any e9piry date or last day "or presentation( Copyright Virtual ni!ersity o" Pakistan 213
Banking Laws and Practices-BNK 601 VU 4 presentation including one or %ore original transport docu%ents su$Dect to articles 15+ @0+ @1+ @@+ @?+ @7 or @B %ust $e %ade $y or on $ehal" o" the $ene"iciary not later than @1 calendar days a"ter the date o" ship%ent as descri$ed in these rules+ $ut in any e!ent not later than the e9piry date o" the credit( 'ata in a docu%ent+ when read in conte9t with the credit+ the docu%ent itsel" and international standard $anking practice+ need not $e identical to+ $ut %ust not con"lict with+ data in that docu%ent+ any other stipulated docu%ent or the credit( ,n docu%ents other than the co%%ercial in!oice+ the description o" the goods+ ser!ices or per"or%ance+ i" stated+ %ay $e in general ter%s not con"licting with their description in the credit( "( ," a credit re*uires presentation o" a docu%ent other than a transport docu%ent+ insurance docu%ent or co%%ercial in!oice+ without stipulating $y who% the docu%ent is to $e issued or its data content+ $anks will accept the docu%ent as presented i" its content appears to "ul"ill the "unction o" the re*uired docu%ent and otherwise co%plies with su$-article 17 3d8( 4 docu%ent presented $ut not re*uired $y the credit will $e disregarded and %ay $e returned to the presenter( ," a credit contains a condition without stipulating the docu%ent to indicate co%pliance with the condition+ $anks will dee% such condition as not stated and will disregard it( 4 docu%ent %ay $e dated prior to the issuance date o" the credit+ $ut %ust not $e dated later than its date o" presentation( <hen the addresses o" the $ene"iciary and the applicant appear in any stipulated docu%ent+ they need not $e the sa%e as those stated in the credit or in any other stipulated docu%ent+ $ut %ust $e within the sa%e country as the respecti!e addresses %entioned in the credit( #he shipper or consignor o" the goods indicated on any docu%ent need not $e the $ene"iciary o" the credit( 4 transport docu%ent %ay $e issued $y any party other than a carrier+ owner+ %aster or charterer pro!ided that the transport docu%ent %eets the re*uire%ents o" articles 15+ @0+ @1+ @@+ @? or @7 o" these rules( Article 0 Com(l#ing /resentation <hen an issuing $ank deter%ines that a presentation is co%plying+ it %ust honor( <hen a con"ir%ing $ank deter%ines that a presentation is co%plying+ it %ust honor or negotiate and "orward the docu%ents to the issuing $ank( <hen a no%inated $ank deter%ines that a presentation is co%plying and honors or negotiates+ it %ust "orward the docu%ents to the con"ir%ing $ank or issuing $ank( Article 6 Commercial ?nvoice 4 co%%ercial in!oice& iC -ust appear to ha!e $een issued $y the $ene"iciary 3e9cept as pro!ided in article ?C8J iiC -ust $e %ade out in the na%e o" the applicant 3e9cept as pro!ided in su$-article ?C 3g88J iiiC -ust $e %ade out in the sa%e currency as the creditJ and ivC Need not $e signed( 4 no%inated $ank acting on its no%ination+ a con"ir%ing $ank+ i" any+ or the issuing $ank %ay accept a co%%ercial in!oice issued "or an a%ount in e9cess o" the a%ount per%itted $y the credit+ and its decision will $e $inding upon all parties+ pro!ided the $ank in *uestion has not honored or negotiated "or an a%ount in e9cess o" that per%itted $y the credit( #he description o" the goods+ ser!ices or per"or%ance in a co%%ercial in!oice %ust correspond with that appearing in the credit( Article !8 &ill o% 4ading A bill o% lading, )o'ever named, must a((ear to: iC ,ndicate the na%e o" the carrier and $e signed $y& #he carrier or a na%ed agent "or or on $ehal" o" the carrier+ or 214 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 #he %aster or a na%ed agent "or or on $ehal" o" the %aster
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4ny signature $y the carrier+ %aster or agent %ust $e identi"ied as that o" the carrier+ %aster or agent( 4ny signature $y an agent %ust indicate whether the agent has signed "or or on $ehal" o" the carrier or "or or on $ehal" o" the %aster( 4 $ill o" lading+ howe!er na%ed+ %ust appear to& iiC ,ndicate that the goods ha!e $een shipped on $oard a na%ed !essel at the port o" loading stated in the credit $y& Pre-printed wording+ or iiC 4n on $oard notation indicating the date on which the goods ha!e $een shipped on $oard( #he date o" issuance o" the $ill o" lading will $e dee%ed to $e the date o" ship%ent unless the $ill o" lading contains an on $oard notation indicating the date o" ship%ent+ in which case the date stated in the on $oard notation will $e dee%ed to $e the date o" ship%ent( ," the $ill o" lading contains the indication Mintended !esselM or si%ilar *uali"ication in relation to the na%e o" the !essel+ an on $oard notation indicating the date o" ship%ent and the na%e o" the actual !essel is re*uired( ,ndicate ship%ent "ro% the port o" loading to the port o" discharge stated in the credit C iiiC Be the sole original $ill o" lading or+ i" issued in %ore than one original+ $e the "ull set as indicated on the $ill o" lading( VC contain ter%s and conditions o" carriage or %ake re"erence to another source containing the ter%s and conditions o" carriage 3short "or% or $lank $ack $ill o" lading8( Contents o" ter%s and conditions o" carriage 'ill not be eBamined( viC Contain no indication that it is su$Dect to a charter party( /or the purpose o" this article+ transship%ent %eans unloading "ro% one !essel and reloading to another !essel during the carriage "ro% the port o" loading to the port o" discharge stated in the credit( iC 4 $ill o" lading %ay indicate that the goods will or %ay $e transshipped pro!ided that the entire carriage is co!ered $y one and the sa%e $ill o" lading( iiC 4 $ill o" lading indicating that transship%ent will or %ay take place is accepta$le+ e!en i" the credit prohi$its transship%ent+ i" the goods ha!e $een shipped in a container+ trailer or L4:1 $arge as e!idenced $y the $ill o" lading( Clauses in a $ill o" lading stating that the carrier reser!es the right to transship will $e disregarded( Article !* Air Trans(ort 7ocument 4n air transport docu%ent+ howe!er na%ed+ %ust appear to& iC ,ndicate the na%e o" the carrier and $e signed $y& #he carrier+ or aC 4 na%ed agent "or or on $ehal" o" the carrier bC 4ny signature $y the carrier or agent %ust $e identi"ied as that o" the carrier or agent( cC 4ny signature $y an agent %ust indicate that the agent has signed "or or on $ehal" o" the carrier( iiC ,ndicate that the goods ha!e $een accepted "or carriage( iiiC ,ndicate the date o" issuance( #his date will $e dee%ed to $e the date o" ship%ent unless the air transport docu%ent contains a speci"ic notation o" the actual date o" ship%ent+ in which case the date stated in the notation will $e dee%ed to $e the date o" ship%ent( 4ny other in"or%ation appearing on the air transport docu%ent relati!e to the "light nu%$er and date will not $e considered in deter%ining the date o" ship%ent( ,ndicate the airport o" departure and the airport o" destination stated in the credit( Be the original "or consignor or shipper+ e!en i" the credit stipulates a "ull set o" originals( Copyright Virtual ni!ersity o" Pakistan 215
ivC
Banking Laws and Practices-BNK 601 VU vC Contain ter%s and conditions o" carriage or %ake re"erence to another source containing the ter%s and conditions o" carriage( Contents o" ter%s and conditions o" carriage will not $e e9a%ined( /or the purpose o" this article+ transship%ent %eans unloading "ro% one aircra"t and reloading to another aircra"t during the carriage "ro% the airport o" departure to the airport o" destination stated in the credit( cC iC 4n air transport docu%ent %ay indicate that the goods will or %ay $e transshipped+ pro!ided that the entire carriage is co!ered $y one and the sa%e air transport docu%ent( iiC 4n air transport docu%ent indicating that transship%ent will or %ay take place is accepta$le+ e!en i" the credit prohi$its transship%ent( Article !5 Clean Trans(ort 7ocument 4 $ank will only accept a clean transport docu%ent( 4 clean transport docu%ent is one $earing no clause or notation e9pressly declaring a de"ecti!e condition o" the goods or their packaging( #he word McleanM need not appear on a transport docu%ent+ e!en i" a credit has a re*uire%ent "or that transport docu%ent to $e Mclean on $oardM( Article * /artial 7ra'ings or S)i(ments Partial drawings or ship%ents are allowed( 4 presentation consisting o" %ore than one set o" transport docu%ents e!idencing ship%ent co%%encing on the sa%e %eans o" con!eyance and "or the sa%e Dourney+ pro!ided they indicate the sa%e destination+ will not $e regarded as co!ering a partial ship%ent+ e!en i" they indicate di""erent dates o" ship%ent or di""erent ports o" loading+ places o" taking in charge or dispatch( ," the presentation consists o" %ore than one set o" transport docu%ents+ the latest date o" ship%ent as e!idenced on any o" the sets o" transport docu%ents will $e regarded as the date o" ship%ent( 4 presentation consisting o" one or %ore sets o" transport docu%ents e!idencing ship%ent on %ore than one %eans o" con!eyance within the sa%e %ode o" transport will $e regarded as co!ering a partial ship%ent+ e!en i" the %eans o" con!eyance lea!e on the sa%e day "or the sa%e destination( 4 presentation consisting o" %ore than one courier receipt+ post receipt or certi"icate o" posting will not $e regarded as a partial ship%ent i" the courier receipts+ post receipts or certi"icates o" posting appear to ha!e $een sta%ped or signed $y the sa%e courier or postal ser!ice at the sa%e place and date and "or the sa%e destination( Article ** Aours o% /resentation 4 $ank has no o$ligation to accept a presentation outside o" its $anking hours( Article *. "orce Majeure 4 $ank assu%es no lia$ility or responsi$ility "or the conse*uences arising out o" the interruption o" its $usiness $y 4cts o" >od+ riots+ ci!il co%%otions+ insurrections+ wars+ acts o" terroris%+ or $y any strikes or lockouts or any other causes $eyond its control( 4 $ank will not+ upon resu%ption o" its $usiness+ honor or negotiates under a credit that e9pired during such interruption o" its $usiness( Article *6 Trans%erable Credits 4 $ank is under no o$ligation to trans"er a credit e9cept to the e9tent and in the %anner e9pressly consented to $y that $ank( "or t)e (ur(ose o% t)is article: 216 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU #rans"era$le credit %eans a credit that speci"ically states it is Mtrans"era$leM( 4 trans"era$le credit %ay $e %ade a!aila$le in whole or in part to another $ene"iciary 3Msecond $ene"iciaryM8 at the re*uest o" the $ene"iciary 3M"irst $ene"iciaryM8( #rans"erring $ank %eans a no%inated $ank that trans"ers the credit or+ in a credit a!aila$le with any $ank+ a $ank that is speci"ically authori2ed $y the issuing $ank to trans"er and that trans"ers the credit( 4n issuing $ank %ay $e a trans"erring $ank( #rans"erred credit %eans a credit that has $een %ade a!aila$le $y the trans"erring $ank to a second $ene"iciary( nless otherwise agreed at the ti%e o" trans"er+ all charges 3such as co%%issions+ "ees+ costs or e9penses8 incurred in respect o" a trans"er %ust $e paid $y the "irst $ene"iciary( 4 credit %ay $e trans"erred in part to %ore than one second $ene"iciary pro!ided partial drawing or ship%ents are allowed( 4 trans"erred credit cannot $e trans"erred at the re*uest o" a second $ene"iciary to any su$se*uent $ene"iciary( #he "irst $ene"iciary is not considered to $e a su$se*uent $ene"iciary( 4ny re*uest "or trans"er %ust indicate i" and under what conditions a%end%ents %ay $e ad!ised to the second $ene"iciary( #he trans"erred credit %ust clearly indicate those conditions( ," a credit is trans"erred to %ore than one second $ene"iciary+ reDection o" an a%end%ent $y one or %ore second $ene"iciary does not in!alidate the acceptance $y any other second $ene"iciary+ with respect to which the trans"erred credit will $e a%ended accordingly( /or any second $ene"iciary that reDected the a%end%ent+ the trans"erred credit will re%ain un-a%ended( #he trans"erred credit %ust accurately re"lect the ter%s and conditions o" the credit+ including con"ir%ation+ i" any+ with the e9ception o"& #he a%ount o" the credit+ 4ny unit price stated therein+ #he e9piry date+ #he period "or presentation+ or #he latest ship%ent date or gi!en period "or ship%ent+ #he "irst $ene"iciary has the right to su$stitute its own in!oice and dra"t+ i" any+ "or those o" a second $ene"iciary "or an a%ount not in e9cess o" that stipulated in the credit+ and upon such su$stitution the "irst $ene"iciary can draw under the credit "or the di""erence+ i" any+ $etween its in!oice and the in!oice o" a second $ene"iciary( ," the "irst $ene"iciary is to present its own in!oice and dra"t+ i" any+ $ut "ails to do so on "irst de%and+ or i" the in!oices presented $y the "irst $ene"iciary create discrepancies that did not e9ist in the presentation %ade $y the second $ene"iciary and the "irst $ene"iciary "ails to correct the% on "irst de%and+ the trans"erring $ank has the right to present the docu%ents as recei!ed "ro% the second $ene"iciary to the issuing $ank+ without "urther responsi$ility to the "irst $ene"iciary( #he "irst $ene"iciary %ay+ in its re*uest "or trans"er+ indicate that honor or negotiation is to $e e""ected to a second $ene"iciary at the place to which the credit has $een trans"erred+ up to and including the e9piry date o" the credit( #his is without preDudice to the right o" the "irst $ene"iciary in accordance with su$article ?C 3h8(Presentation o" docu%ents $y or on $ehal" o" a second $ene"iciary %ust $e %ade to the trans"erring $ank( Article *Assignment o% /roceeds #he "act that a credit is not stated to $e trans"era$le shall not a""ect the right o" the $ene"iciary to assign any proceeds to which it %ay $e or %ay $eco%e entitled under the credit+ in accordance with the pro!isions o" applica$le law( #his article relates only to the assign%ent o" proceeds and not to the assign%ent o" the right to per"or% under the credit( Uni%orm Rules %or Contract Guarantee ?CC (ublication R *!0 #hese rules apply to any guarantee+ $ond+ inde%nity+ surety or si%ilar undertaking 3 guarantee8 which states that it is su$Dect to uni"or% rules "or contract guarantee o" the international cha%$er o" co%%erce 3pu$lication _ ?@B8 Copyright Virtual ni!ersity o" Pakistan 217
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T)e im(ortant rules are given )ereunder: Tender GuaranteeM ,n this type o" guarantee+ the guarantor undertakes that in the e!ent o" de"ault $y the tendered 3Principal8 in "ul"ill%ent o" his o$ligations resulting "ro% su$%ission o" tender+ to %ake pay%ent to the $ene"iciary within the li%its o" a stated su% o" %oney( ni"or% ;ules "or Contract >uarantee #ender guarantees ensure that the party su$%itting the tender will not withdraw his tender $e"ore adDudication and that he will accept and sign the contract i" and when awarded to hi%( #he $ene"iciary that is the party awarding the contract %ay clai% under the guarantee up to the stated su% in the e!ent o" de"ault $y the contractor( ni"or% ;ules "or Contract >uarantee #he tender guarantees is issued $y the contractorEs $ank at his re*uest in "a!or o" contract awarding party 3the $ene"iciary8 ,t is usually one percent to "i!e percent o" tender !alue #ender guarantee has a "i9ed e9piry date /er%ormance Guarantee: ,t is an undertaking gi!en $y a $ank etc(+ 3>uarantor8 where$y the guarantor undertakes to %ake pay%ent to the $ene"iciary within the li%its o" stated su% o" %oney on non per"or%ance o" certain contractual o$ligations o" the contract( ,t is usually "or a "i9ed percentage o" B Y to 10Y o" contract !alue( Uni%orm Rules %or Contract Guarantee /arties in (er%ormance Guarantee >uarantor Principal 3#enderer8 Bene"iciary 3the Party in!iting tender8 Uni%orm Rules %or 7emand GuaranteesD;UR7G 106< #hese rules are contained in ,CC $rochure _ 7BC( ,%portant rules are gi!en hereunder& 4 de%and is re*uired to $e %ade $y the $ene"iciary to the issuing $ank in accordance with ter%s o" guarantee and $e"ore its e9piry( 7ut# o% Guarantor #o pay to $ene"iciary the a%ount stated on de%and Rules as contained in various articles: Counter guarantee to $e "urnished $y the principal in "a!or o" guarantor 4ll instructions should $e clear and (recise All guarantees s)ould sti(ulate t)e %ollo'ing (arties: Principal 3contractor8 Bene"iciary 3the party to who% pay%ent is to $e %ade $y $ank etc on de%and in case o" de"ault $y the principal8 >uarantor 3Bank. ,nsurance Co%pany etc(8 S(eci%# t)e underline transaction %or ')ic) t)e guarantee issued: -a9i%u% a%ount along with the currency in which the a%ount is paya$le )9piry date . e!ent #er%s "or de%anding pay%ent 4ll guarantees and counter guarantees shall $e irre!oca$le >uarantee shall $e e""ecti!e "ro% the date o" issue 'ocu%ents inconsistent with ter%s shall $e re"used $y the guarantor( Copyright Virtual ni!ersity o" Pakistan 218
Banking Laws and Practices-BNK 601 VU )9a%ination o" docu%ents $y guarantor in reasona$le ti%e( ,n case o" deciding re"usal $y the guarantor+ $ene"iciary should $e noti"ied i%%ediately >uarantor to act in good "aith and with reasona$le care Lia$ility o" guarantor to the e9tent o" ter%s speci"ied in guarantee ,n case o" de%and recei!ed $y the guarantor+ principal to $e in"or%ed $y guarantor( #er%ination o" guarantee on pay%ent o" entire a%ount. de%and 'e%and shall $e %ade $e"ore e9piry date+ in accordance with the ter%s 'e%and to $e %ade. docu%ents to $e presented at the place o" issue o" guarantee 'e%and "or pay%ent should $e %ade in writing and re*uired docu%ents to $e attached there with( >uarantees shall $e go!erned $y the law applica$le at the place o" issue o" guarantee
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Banking Laws and Practices-BNK 601 7ES?GN?NG 4EGA4 7OCUMENTS
VU LESSON 37
Aire+/urc)ase Agreement 1ire-Purchase agree%ent is the $asis o" "acility. "inance pro!ided $y the $ank to the hirer( ,n these cases+ the party a!ailing the "acility or the $orrower is the hirer and the party pro!iding the "acility. credit is the purchase( ,n this arrange%ent+ the $ank in the capacity o" purchaser purchases the articles "ro% the supplier and the $orrower. hirer agrees to hire the said articles "ro% the $ank and $ank agrees to let out said articles to the hirer( #he hirer is re*uired to pay %onthly. or periodic rent under hirepurchase agree%ent( #he speci%en o" hire-purchase agree%ent is appended $elow& S(ecimen o% Aire+/urc)ase agreement #his agree%ent %ade at-------- this the @ nd day o" -arch+ @00C $etween 4BC $ank hereina"ter called FT)e &an$P and -.: SIZ--------- called LT)e AirerG <hereas the hirer has agreed to ac*uire the 4rticles as per agree%ent and also agreed to hire "ro% the Bank the said articles and the $ank at the re*uest and "or the use o" the 1irer has agreed to purchase the said 4rticles "ro% its supplier a"ter paying the cost+ charges etc( and has entered into 1ire- Purchase agree%ent( 1irer has agreed to pay %onthly rent o" ;s(---,t is agreed $etween the parties as %entioned in "orthco%ing 4rticles( #he Bank at the re*uest o" and a"ter ha!ing recei!ed an initial deposit o" ;s((((((((((( "ro% the hirer3s8 shall purchase the said articles "ro% its supplier $y %aking pay%ent o" the price o" ;s\\\and.or entering into an agree%ent with the supplier in this regard (and (shall ac*uire all the ownership+ proprietary rights+ title and interest in the Hsaid articles and e!ery part thereo" in its own "a!or( #he Bank shall procure the docu%ents e!idencing its title to Kthe said articlesH and shall get all the "or%alities co%pleted in this regard( #hat t)e hirer3s8+ against a deli!ery order o" the Bank+ shall o$tain.procure the physical deli!ery and possession o" Hthe said articles directly "ro% the supplier a"ter holding thorough inspection.e9a%ination 3hereo" and ha!ing $een "ully satis"ied that 3the said articles are in accordance with the speci"ication appro!ed $y 3he hirers8 #he Bank shall not $e lia$le "or any short"all+ de"ect or lacuna whatsoe!er which %ay $e su$se*uently disco!ered $y %e hirer in 3the said articles and the hirer shall solely $e responsi$le "or 3the sa%e and shall inde%ni"y the Bank against any losses or da%age that the Bank %ay incur as a conse*uence o" any short"all+ de"ect or lacuna that %ay $e "ound in the said articles( #he hirer3s8 con"ir% that the said articles shall continue to $e the sole and e9clusi!e property o" %e Bank and the hirer3s8 shall ha!e no right+ interest and clai% therein $y reason o" the original contract arrange%ent ha!ing $een entered into $y the% with the supplier or due to any reason whatsoe!er and until Hthe said articlesH are speci"ically con!eyed $y the Bank unto the hirer3s8 and the sa%e during the su$sistence o" this agree%ent shall $e held $y the hirer %erely as $ailee with no authority whatsoe!er to %ortgage+ pledge+ su$ let or otherwise use the sa%e "or any purpose other than "or which it was hired $y and deli!ered to the hirer3s8( ART?C4E + ?? Securit# %or ?ntermediate /eriod #hat until the ac*uisition o" Mthe said articlesH in "a!or o" the Bank is co%pleted in all respect+ the BankHs co%%it%ent shall a%ount to an acco%%odation or a "acility or an in!est%ent "or the purposes and use o" the hirer3s8 and the hirers undertake to inde%ni"y the Bank "ro% all risks and losses due to any de"ault or $y reason o" any o%issions and co%%issions leading to any such risks and losses to the Bank directly or indirectly(
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Banking Laws and Practices-BNK 601 VU #hat the hirers in order to assure the $etter per"or%ance o" the hirerHs o$ligations hereunder shall e9ecute and "urnish such securities and guarantees in "a!or o" the Bank as %ay dee% "it within the sole discretion o" the Bank "ro% ti%e to ti%e( ART?C4E+??? Aire+/urc)ase Covenant 1( #he hirer has agreed to take and the Bank has agreed to let on hire Hthe said articlesH on pay%ent o" %onthly rent.hire install%ent o" ;s(1B+ 000. ((((((((((((((((((((((("or a period o"(((7C(((J((((((((((((((((((((((%onths each paya$le $y 3the hirer3s8 to 3he Bank on and $e"ore 10th day o" each %onth without de"ault or delay co%%encing "ro% the %onth o"(((((((((((((((((((((((((((((((@00C( #hat the hirer(3s8 shall o$tain the deli!ery o" Hthe said articlesH directly "ro% the supplier or their agent against a deli!ery order issued $y 3the Bank and shall %anage "or installation+ "i9ation+ storage and transportation thereo" and shall hold and enDoy the peace"ul and *uite possession thereo" as a $ailee and shall $e entitled to use H3the said articles8 or the purpose it was hired without any let and hindrance whatsoe!er until 3the Bank ter%inates 3the arrange%ent with prior notice or otherwise re-lakes 3the possession.custody thereo"( ,n the e!ent o" regular pay%ent o" the hire %oney in %onthly install%ents "or the "ull and entire hire period as stipulated herein and co%pliance o" the ter% and conditions hereto during 3the agreed period $y 3the hirer the said articles shall at 3the hirerHs option $eco%e the a$solute property o" the hirer on pay%ent o" a token a%ount o" ;s( 100. to the Bank and the Bank shall trans"er the ownership unto the hirer( *C Notwithstanding the a$o!e the hirer shall ha!e the option o" purchasing Kthe said articleE at any ti%e during the su$sistence o" the agree%ent $y paying tileJ hire install%ents "or the re%aining hire period in lu%p su% together with other e9penses as %ay ha!e $een incurred $y the Bank( #hat during the su$sistence hereo" the a"ore%entioned %onthly rent.hire install%ents shall not $e su$Dect to suspension or delay due to any reason including any "orce %aDor circu%stances nor shall $e withheld or delayed due to Hthe said articlesH $eing out o" operation and.or $eco%ing non-producti!e and.or $reakage and.or %echanical "ault and.or non-receipt o" M,nsurance clai%3s8 "or non-installation and.or due to any other cause whatsoe!er( #he hirer shall+ during the su$sistence o" the arrange%ent e!idenced $y these presents keep the said articles in its sole custody and control in good working condition at the speci"ic address o" die hirer and at no other place unless otherwise per%itted $y the Bank i" writing and shall not allow the said articles to $e used $y any $ody else nor shall without written consent o" the Bank e%ploy the sa%e "or the purposes other than the purpose "or which the said articles were originally ac*uired $y the hirer #he hirer shall $e o$liged to allow the BankHs =""icers aid no%inees to inspect+ sur!ey and e9a%ine the said articles at any ti%e without prior notice to the hirer and shall also "urnish periodical reports to the Bank in such "or% as %ay $e re*uired $y the Bank( #he hirer3s8 shall not during 3he su$sistence o" these presents and until "inal con!eyance o" the said articles $y the Bank to %e hirer+ %ortgage+ trans"er+ hypothecate+ pledge+ gi"t+ lease or su$let the said articles or part thereo" to any one nor shall the hirer create any charge+ encu%$rances or $urdens in any %anner against the said articles or part thereo"( (#he hirer shall keep the said articles in good repaira$le condition and working order and shall take all appropriate %easures to sa!e the sa%e "ro% any sort o" de"ect+ loss+ inDury and da%age and depreciationM to the said article and accessories thereto( 4nd such de"ect+ loss+ da%age and inDury and whene!er so occurred and caused thereto during the currency o" the arrange%ent shall $e "orthwith re%o!ed $y the hirer at his own cost and risk #he hirer shall always keep 3he said articles duly insured in the na%e o" the Bank with such ,nsurance Co%pany 3ies8 as %ay $e appro!ed $y the Bank against loss due to "ire.stor%+ the"t+ accident+ natural cala%ities and other risks and shall pay the pre%iu% there against prior to the e9piry o" the e9isting insurance and.or $e"ore the taking o" the deli!ery o" the said articles( -C ,n case the hirer "ails to purchase such ,nsurance Policy the Bank shall $e entitled $ut shall not $e $ound+ to get the said articles duly insured at the cost o" the hirer( Copyright Virtual ni!ersity o" Pakistan 221
Banking Laws and Practices-BNK 601 VU #he hirer shall pay all the rates+ ta9es+ tolls+ license "ee+ charges+ "ine+ cuss and other i%position which %ay $e paya$le to any >o!ern%ent and :e%i->o!ern%ent 4gency+ authority+ $ody and.or pri!ate person whosoe!er( ART?C4E+?VD?N TAE EVENT O" 7E"AU4T 4ny o" the "ollowing shall $e considered to $e an e!ent o" de"ault( ," the hirer& Co%%its de"ault in pay%ent o" the %onthly rent.hire install%ent within the stipulated ti%e or /ails to o$ser!e all or any o" the co!enants hereo" and the ter%s herea"ter prescri$ed $y the $ank or Neglects to %aintain and.or "ails to keep the said articles during the su$sistence o" the arrange%ents to the satis"action o" the $ank or ad%its and co%%its such act which %ay Deopardi2e the interest o" the $ank in any %anner whatsoe!er or /ails to "urnish %e securities.guarantees to the satis"action o" the $ank or Co%%its any act o" insol!ency and.or happens to $e adDudicated insol!ent or enters into an arrange%ent with its.his creditors or -akes or has %ade nay state%ent or declaration+ in"or%ation and representation which is or appears to $e "alse and incorrect or 4llows any o" his %o!ea$le and i%%o!ea$le properties to $e attached in e9ecution o" a decree( 4llows any o" his %o!ea$le and i%%o!ea$le properties to $e attached in e9ecution o" a decree( !C ,n any o" the a$o!e e!ents the Bank shall $e entitled to ter%inate %iss agree%ent and %ay at its a$solute discretion proceed to re-take the possession o" the Hsaid articlesH and also to reco!er the de"aulted hire install%ents.rents "ro% 3the hirer together with such e9penses+ costs and da%ages as %ay ha!e accrued+ incurred and sustained $y the Bank and shall also i%pose and reco!er such additional penalties as %ay dee% "it and proper to the Bank( *C ,n the e!ent o" the ter%ination o" 3he hire agree%ent $e"ore the e9piry o" the hire period the hirer shall i%%ediately hando!er the physical possession o" the said articles with all its accessories to the BankHs no%inees in good working condition and shall not clai% any co%pensation or re"und o" any su% or su%s paid $y hi%+ nor shall de%and any e9penses %ade $y the hirer in %aintaining o" the said articles( 4nd 3he hirer until actual deli!ery o" the said articles to the Bank shall also $e responsi$le to pay %e co%pensation "or holding o!er to 3the Bank as %ay $e deter%ined $y the Bank within its a$solute discretion which de%and shall dee% to $e conclusi!e and $inding on the hirer3s8 without re"erence to any one and.or scrutiny and o$Dection whatsoe!er( ART?C4E+V Termination o% t)e Agreement: #he Bank+ on occurrence o" any e!ent o" de"ault %ay ter%inate the agree%ent and proceed "orthwith "or taking the deli!ery o" the said article and reco!ery o" arrears o" the hire %oney+ co%pensation+ penalties+ e9penses+ losses and da%ages etc( without preDudice to other recourses a!aila$le to the Bank against the hirer and their guarantors( ART?C4E+V? ?N7EMN?T= C4AUSE #he hirer shall always keep the ;ank duly inde%ni"ied "ro% all risks to which 3the Bank %ay $e e9posed due to 3the reason o" purchasing tile said articles at the instance o" the hirer and $y reason o" entering into hire purchase arrange%ents with the hirer or $ecause o" any %atters incidental thereto( #he hirer3s8 "urther undertake to pay all hire %oney as per stipulation and together with all su%s which the Bank %ay de%and on account o" losses+ charges+ e9penses+ co%pensation+ da%ages+ penalties+ accrued+ incurred and.or sustained or apprehend to $e accrued or sustained $y the Bank due to the said arrange%ents and the things allied thereto within se!en days "ro% 3the receipt o" a de%and "ro% the Bank which de%and snail $e conclusi!e and $inding on the hirers without re"erence and recourse to anyone and.or o$Dection and scrutiny whatsoe!er( ,n witnesses whereo"+ the parties hereto ha!e respecti!ely set and su$scri$ed their hands and seal this day+ %onth and year "irst a$o!e written( 222 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 S?GNATURES ++ On be)al% o% t)e &an$ ++ O% t)e )irerC
VU 2?TNESSESN -- /or and on $ehal" o" the B4NK ++ "or and on $ehal" o" 1,;);
?RREVOCA&4E GUARANTEE9SURET= UN7ER A?RE+/URCAASE AGREEMENT: ,n consideration o" your ha!ing entered into the hire-purchase agree%ent.arrange%ent with -r(.-.s((((((((((((((((((((((((((((((((((((((((((((((( 3 hereina"ter re"erred to hirers8 at our re*uest+ ,.we 318 son o" resident o" 3@8 son o% resident o" 'o here$y undertake as "ollows&N C ,.we Dointly and se!erally undertake to stand surety.sureties "or and on $ehal" o" the hirer and guarantee the true and speci"ic per"or%ance o" all the co!enants en!isaged in the said hire-purchase agree%ent dated(((((((((((((((((((((((((((((((((with your Bank within such li%e and %anner as %ay $e stipulated in the agree%ent and as %ay $e prescri$ed $y your !C ,n the e!ent o" de"ault and delay in the discharge o" the o$ligations o" 3the hirers+ we shall pay all the su%s to you within the period o" three days "ro% the de%and %ade $y you "ro% us without re"erence to any one( *C )ach de%and %ade $y the Bank here under shall $e dee%ed to $e conclusi!e and $inding on %e.us and %y.our legal heirs( 1C #he total lia$ilities here under shall $e li%ited to the e9tent o" ;s((((((((((((((((((((((((((((((((((Notwithstanding any indulgence arrange%ent entered into $etween the Bank and the hirers 0C #he o$ligations arising herein against %e.us shall $e continuing and su$sisting until the sa%e is.s-"e speci"ically discharged $y the Bank and it shall always $e dee%ed 3o $e in addition o" the other securities+ i" any( pro!ided $y the hirer( !C ,N <,#N)::): hereo" the sureties na%ed a$o!e ha!e signed and su$scri$ed their respecti!e hand on this(((((((((((((((((((day *C o"((((((((((((((((@00C(((at S?GNATURE C Suret#SSSSSSSSSSSS !C Suret#SSSSSSSSSSSS 2?TNESSES: ++++++++++++++++++++++++++++ !+++++++++++++++++++++++++++++ S(ecimen o% 7eed o% Mortgage #his deed o" -ortgage is %ade this @@nd day o" 4pril+ @00C $etween -r( I ;esident o" >ul$erg+ Lahore hereina"ter re"erred to as the -ortgagor o" the =N) P4;# and -.: SIZ B4NK L41=;)+ a li%ited $anking co%pany ha!ing its registered o""ice at ,(, >hundrigarh ;oad+ Karachi 3 hereina"ter re"erred to as -ortgagee8 o" the =#1); P4;#( #he K-ortgagorE and -ortgagee shall where the conte9t so re*uires or per%its+ $e dee%ed to include their respecti!e heirs+ legal representati!es+ assignees and successors-in-interest or persons deri!ing title "ro% or under the%( <hereas %ortgagor is the law"ul owner o" the property descri$ed at schedule-11 and whereas %ortgagor has a!ailed "inance as %entioned in :chedule-1 "ro% the %ortgagee. $ank( Now there"ore+ this deed witnesses as "ollows& #hat the %ortgagor declares and con"ir%s that he is sei2ed and possessed o" and otherwise well su""iciently entitled to the -ortgaged Property and sa%e is "ree "ro% any charges or encu%$rances( ,n consideration o" the $ank ha!ing sanctioned "inance a%ounting to ;s( 1+B00+000 the %ortgagor here$y %ortgages the property descri$ed at schedule-11 to hold the sa%e until the pay%ent. repay%ent o" entire a%ount due under the agree%ent up to %a9i%u% o" ;s( 1+B00+000.- with cost+ charges+ %arksup+ e9penses and li*uidated da%ages paya$le to the $ank or incurred $y the $ank( Copyright Virtual ni!ersity o" Pakistan 223
Banking Laws and Practices-BNK 601 Sc)edule M? 4%ount o" "inance 4%ount o" -ark up ;s 1+B00+000.;s 1B0+000.-
VU
Sc)edule M?? 4ll the piece and parcel o" plot o" land -easuring @0 -arlas $earing _ @71-Z Aohar #own+ Lahore+ together with $uilding+ <alls+ structures+ /i9tures+ 4ttach%ents+ <alls and $ounded as under& =n or towards north $y& :treet-na%ed Kash%ir ;oad =n or towards south $y & 1ouse No 170 =n or towards east $y& 1ouse No @70 =n or towards west $y& 1ouse No @7@ 'eed o" -ortgage ,n witness whereo" the -ortgagor has set and su$scri$ed his hands on the day+ %onth and year+ "irst herein a$o!e written( :igned and deli!ered Signature By the -ortgagor in the Mortgagor presence o" "ollowing 2itnesses: <itness 1WWWWWWWWWWWWW <itness @WWWWWWWWWWWWW 4etter o% A#(ot)ecation S(ecimen o% 4etter o% A#(ot)ecation: ,n consideration o" #he SIZ Bank Ltd( ---- ( 3hereina"ter called the FBankG which e9pression shall include its :uccessors and 4ssigns8 granting.agreeing to grant.continue granting loans.ad!ances.credit $anking "acilities 3hereina"ter called the F/acilitiesG8 a%ounting to ;s(--- to %e. us to such e9tent and "or so long as the Bank %ay think "it+ ,.<e the undersigned WW-------WWWWWWWWWWWWWP(=(Bo9 No -------3hereina"ter called the FBorrowerG which e9pression shall include %e.us and %y.our legal heirs+ :uccessors and 4ssigns 8 here$y hypothecate+ in "a!our o" the Bank $y way o" "irst charge + as security+ "or "ull repay%ent o" the "acilities to the Bank together with all charges+ all things and stocks as descri$ed in general ter%s in the schedule hereto+ 3hereina"ter called the F>oodsG8+ which e9pression shall include all products and stocks and %o!ea$le property+ o" any kind and whether raw or in process o" %anu"acture and all things or articles %anu"actured there "ro% which now or therea"ter "ro% ti%e to ti%e during the process shall $e $rought into store3s8 or $e in or a$out the BorrowerEs godown3s8 or pre%ises at di""erent places including in course o" transit or deli!ery ( #he Borrower here$y undertakes and co!enants the "ollowing with the Bank& aC #he Borrower shall not at any ti%e so long as there shall $e any a%ount due $y the Borrower to the Bank re%o!e or cause or per%it to the re%o!ed "ro% the pre%ises and .or godowns where the goods are stored nor di!ert or otherwise dispose o" or encu%$er+ charge or pledge or %ortgage the >oods or any part thereo" to any other party nor do any act where$y the BankEs security shall in any way $e preDudiced or a""ected( #he Borrower here$y undertakes and co!enants the "ollowing with the Bank& bC #he Borrower shall deposit with the Bank all sale proceeds o" the >oods and insurance proceeds and reco!eries thereo"+ which shall always constitute an integral part o" the security( #he Borrower here$y undertakes and co!enants the "ollowing with the Bank& cC ,n the e!ent o" co%%itting any de"ault o" any o" the pro!isions o" this 1ypothecation 'eed+ the Borrower shall pledge the >oods to the Bank $y way o" a "loating charge and all goods and %o!ea$le property o" any kind and nature $elonging to the Borrower which now or therea"ter or 224 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU "ro% ti%e to ti%e during the continuance o" this security $e $rought in+ stored in the pre%ises or go downs as %entioned in the schedule hereto and.or elsewhere on in the course o" transit as a security "or the BorrowerEs inde$tedness to the Bank( #he e9pression BorrowerEs Finde$tednessG to the Bank shall include the principal a%ounts "ro% ti%e to ti%e due on BorrowerEs "acilities together with all interest and all other charges which the Bank %ay pay or incur in connection with the >oods+ or the sale or disposal thereo" and all other %oneys whether hereo" or $y law paya$le $y the Borrower to the Bank in connection with or relation to the >oods( ?( #he Borrower shall %ake and pro!ide to the Bank state%ent periodical reports and returns in respect o" the cost and %arket !alue o" the goods and a detailed description thereo" and produce such e!idence in support thereo" as the Bank %ay "ro% ti%e to ti%e re*uire( #hat the a%ount o" BorrowerEs total inde$tedness to the Bank "or the ti%e $eing together with %ark up .interest and other charges shall all ti%e during the period o" this hypothecation ha!e a %argin not less than WWWWWWWWWW Y o" the %arket !alue o" the hypothecated goods( :uch %arket !alue shall $e decided "ro% ti%e to ti%e $y the $ank which decision shall $e "inal and $inding on the Borrower( #he di""erence $etween the BorrowerEs inde$tedness to the Bank and the %arket !alue o" the goods shall $e %aintained either $y pro!iding "urther security as %ay $e appro!ed $y the Bank or $y cash pay%ent( #he Bank at its sole discretion %ay e%ploy the ser!ices o" any independent :ur!ey the !alue o" hypothecated goods and the cost o" such e!aluation shall $e $orne $y the Borrower( #he Borrower shall insure and keep insured the hypothecated goods "or their "ull %arket !alue against "ire+ pil"erage+ the"t+ da%age+ loss and all other risks with an ,nsurance Co%pany appro!ed $y the Bank with the Banks as /irst Bene"iciary+ in the na%e and the sole $ene"it o" the Bank+ and the Borrower will assign and deli!er to the Bank+ all the insurance policies and deli!er the pre%iu% receipts paid "or such insurance( #he Bank %ay at any ti%e at its sole discretion+ a""ect such insurance at the sole e9pense o" the Borrower+ i" the Borrower "ails to insure the >oods as a"ore%entioned within 1@ 3twel!e8 hours a"ter notice o" de%and ser!ed on the Borrower( 4ll su%s recei!ed under insurance 3s8 as a"oresaid+ shall $e applied towards the li*uidation o" the BorrowerEs inde$tedness to the Bank( #he goods hypothecated to the Bank shall $e kept at the sole risk and responsi$ility o" the Borrower where!er and in whate!er godowns+ pre%ises+ sheds or places they %ay$e stored( #he Borrower shall pay all rents+ rates+ ta9es and other outgoings+ o" the godowns and pre%ises wherein the goods are stored and shall keep the goods and %arketa$le condition( #he Bank or their representati!es or no%inees shall $e entitled at any ti%e without notice to enter any place where the goods are located or stored "or inspection and e9a%ination( Event o% 7e%ault <ithout preDudice to the generality o" the "oregoing+ the Bank shall ha!e the a$solute right at anyti%e without notice to take charge and possession o" the >oods upon occurrence o" any o" the "ollowing e!ents& a( ," the $orrower "ails to %aintain the %argin 3s8 as a"ore%entioned( $( ," the $orrower "ails to pay the $alance 3s8 due to the $ank on de%and( c( ," the $orrower co%%its $reach o" any o" the ter%s and conditions herein contained( d( ," the $orrower su""ers distress or e9ecution to $e le!ied or en"orced upon or against all or any o" the $orrowerEs property( e( ," the $orrower "ails to e""ect any pay%ent o" the inde$tedness on its.their due dates( #he Bank upon taking charge and possession o" the goods in ter%s o" clause 6 shall ha!e e9clusi!e right and discretion to sell the goods and to appropriate the sale proceeds towards satis"action o" the BorrowerEs inde$tedness to the Bank( #he Bank shall ha!e the right to clai% "ro% the Borrower any short"all i" the sale proceeds do not "ully satis"y the BorrowerEs inde$tedness to the Bank( #he Bank records and state%ents %ade $y the Bank showing the inde$tedness o" the Borrower shall $e and continue to $e "inal and conclusi!e e!idence as to the correctness o" such inde$tedness( Copyright Virtual ni!ersity o" Pakistan 225
Banking Laws and Practices-BNK 601 VU #he Borrower here$y declares that all the goods are "ree "ro% any prior lien+ charge or encu%$rance+ whether legal or e*uita$le and that the Borrower holds law"ul authority to hypothecate the >oods( #he Borrower agrees and undertakes to repay to the Bank the entire inde$tedness on receipt o" "irst de%and shall $e a conclusi!e and "inal e!idence that the repay%ent o" the inde$tedness o" the Borrower to the $ank is due( #he Borrower here$y agrees and undertakes to carry out and his.their o$ligations hereo"( #his hypothecation shall operate as a continuing security "or all the inde$tedness or lia$ilities owing $y the Borrower to the Bank notwithstanding any partial or inter%ediate repay%ent3s8 or adDust%ent3s8 %ade at any ti%e+ without preDudice to the other rights and re%edies open to the Bank under the Law( 4ny !iolation o" the ter%s and conditions hereo" shall render the credit "acilities lia$le to $e cancelled( )!ery de%and or notice ser!ed or co%%unicated $y the Bank to the Borrower shall $e considered to ha!e $een duly ser!ed and co%%unicated to the Borrowers i" sent to the recorded address o" the Borrower either $y hand deli!ery+ ordinary or registered %ail+ tele9 and.or any other usual and practiced %eans o" trans%ission . deli!ery( )!ery de%and or notice sent in this %anner $y the Bank to the Borrower or any o" the persons constituting the Borrower shall $e dee%ed to ha!e $een sent to each and all o" such persons( :hould this 'eed $e signed $y %ore than one person+ all signatories hereto shall $e Dointly and se!erally lia$le to Bank "or all the lia$ilities herewith( :hould the Borrower $e a co%pany or a "ir%+ the lia$ility o" such co%pany or "ir% towards the Bank shall re%ain e""ecti!e despite any change in the constitution+ %e%orandu% and.or articles o" association o" the said co%pany or "ir%( <ithout preDudice to the BankEs a$solute right to su$%it to any other law or Durisdiction+ this docu%ent shall $e go!erned construed and interpreted in accordance with the law o" the country( Signatures o% 2itnesses Signature o% t)e borro'erC 2itnessD 2itness+++!
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Banking Laws and Practices-BNK 601 /RU7ENT?A4 REGU4AT?ONS O" S&/
VU LESSON 38
S&/ /rudential Regulations ,n order to pro%ote good go!ernance in the $anking syste% + the :tate Bank o" Pakistan announced a set o" prudential regulations on 4ugust @5+1551(#hese regulations were %ade e""ecti!e "ro% 1st o" Auly+ 155@ Non-Bank /inancial ,nstitution 3NB/,s8 ha!e also $een placed under regulatory regi%e o" :BP( Considerations E "actors %or introducing /rudential Regulations: #he said regulations were introduced keeping in !iew the "ollowing "actorsJ Creation o" healthy lending as well as $orrowing culture( Protection o" depositors as well as share holders interests( ,%pro!e%ent in $anking %anage%ent 0 go!ernance standards+ ensuring a strong+ !ia$le and disciplined growth o" $anking sector( 'esigning %ini%u% criteria "or credit risk %anage%ent( Pre!ention o" %isuse o" $anking "acilities and channels( 3e(g( 4nti %oney laundering regulations8( Regulations %or Cor(orate9Commercial &an$ing -ain contents are outlined hereunder& Part 4N'e"initionsH Part BN;egulations( ^ ;isk -anage%ent( Corporate >o!ernance ;egulations >l to >7 >=C 0 4nti -oney Laundering ;egulations( =perations 4nne9ure( B8 ;egulations /or :%all 0 -ediu% )nterprises /inancing ;egulations ; l #o ; 11 AnneBure /rudential Regulation %or Consumer "inancing Regulations %or consumer %inancingCR to . ;egulations "or Credit cards( 0 ;(60 ;C ;egulations "or 4uto Loan( ;egulation "or 1ousing /inance( ;1B to ;@? ;egulations "or Personal Loan ,ncluding Loans "or Purchase o" Consu%er dura$les( R!1 to R!6 4nne9ure-1- -argin ;e*uire%ents under ;egulation _6 /rudential Regulations %or Consumer "inancing Consu%er "inancing %eans any "inancing allowed to indi!iduals "or their personal+ "a%ily or house hold needs including the "ollowing& Copyright Virtual ni!ersity o" Pakistan 227 =1 to =6 ;-5 to ;17
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Banking Laws and Practices-BNK 601 Credit cards Auto loans Aousing %inance /ersonal loans
VU
7e%initions as contained in t)ese regulations are given )ereunder: &an$ %eans a $anking co%pany as de"ined in the Banking Co%panies =rdinance+ 156@( &orro'er %eans an indi!idual to who% a $ank . '/, has allowed any consu%er "inancing during the course o" $usiness( Consumer "inancing %eans any "inancing allowed to indi!iduals "or %eeting their personal+ "a%ily or household needs( Credit Cards %ean cards which allow a custo%er to %ake pay%ents on credit( :upple%entary credit cards shall $e considered part o" the principal $orrower "or the purposes o" these regulations( Corporate Cards will not "all under this category and shall $e regulated $y Prudential ;egulations "or Corporate . Co%%ercial Banking or Prudential ;egulations "or :-)s /inancing as the case %ay $e( #he regulations "or credit cards shall also $e applica$le on charge cards+ de$it cards+ stored !alue cards and B#/ 3Balance #rans"er /acility8( Auto 4oans %ean the loans to purchase the !ehicle "or personal use( Aousing "inance %eans loan pro!ided to indi!iduals "or the purchase o" residential house . apart%ent . land( #he loans a!ailed "or the purpose o" %aking i%pro!e%ents in house . apart%ent . land shall also "all under this category( /ersonal 4oans %ean the loans to indi!iduals "or the pay%ent o" goods+ ser!ices and e9penses and include ;unning /inance . ;e!ol!ing Credit to indi!iduals( 7"? %eans 'e!elop%ent /inancial ,nstitution and includes the Pakistan ,ndustrial Credit and ,n!est%ent Corporation 3P,C,C8+ the :audi Pak ,ndustrial and 4gricultural ,n!est%ent Co%pany Li%ited+ the Pak Kuwait ,n!est%ent Co%pany Li%ited+ the Pak Li$ya 1olding Co%pany Li%ited+ and any other "inancial institution noti"ied under :ection ?-4 o" the Banking Co%panies =rdinance+ 156@( 7ocuments include !ouchers+ che*ues+ $ills+ pay-orders+ and pro%issory notes+ securities "or leases . ad!ances and clai%s $y or against the $ank . '/, or other papers supporting entries in the $ooks o" a $ank . '/,( E:uit# o% t)e &an$ 9 7"? %eans #ier-, Capital or Core Capital and includes paid-up capital+ general reser!es+ $alance in share pre%iu% account+ and reser!e "or issue o" $onus shares and retained earnings . accu%ulated losses as disclosed in latest annual audited "inancial state%ents( ,n case o" $ranches o" "oreign $anks operating in Pakistan+ e*uity will %ean capital %aintained+ "ree o" losses and pro!isions+ under :ection 1? o" the Banking Co%panies =rdinance+ 156@( "inancial ?nstitutions %ean $anks+ 'e!elop%ent /inancial ,nstitutions 3'/,s8 and Non-Banking /inance Co%panies 3NB/Cs8( Government Securities shall include such types o" Pak( ;upee o$ligations o" the /ederal >o!ern%ent or a Pro!incial >o!ern%ent or o" a Corporation wholly owned or controlled+ directly or indirectly+ $y the /ederal >o!ern%ent or a Pro!incial >o!ern%ent and guaranteed $y the /ederal >o!ern%ent as the /ederal >o!ern%ent %ay+ $y noti"ication in the =""icial >a2ette+ declare+ to the e9tent deter%ined "ro% ti%e to ti%e+ to $e >o!ern%ent :ecurities( 4i:uid Assets are the assets which are readily con!erti$le into cash without recourse to a court o" law and %ean encash%ent . reali2a$le !alue o" go!ern%ent securities+ $ank deposits+ certi"icates o" deposit+ shares o" listed co%panies which are acti!ely traded on the stock e9change+ N,# nits+ certi"icates o" %utual "unds+ Certi"icates o" ,n!est%ent 3C=,s8 issued $y '/,s . NB/Cs rated at least K4E $y a credit rating agency on the appro!ed panel o" :tate Bank o" Pakistan+ listed #/Cs rated at least K4E $y a credit rating agency on the appro!ed panel o" :tate Bank o" Pakistan and certi"icates o" asset %anage%ent co%panies "or which there is a $ook %aker *uoting daily o""er and $id rates and there is acti!e secondary %arket trading( Copyright Virtual ni!ersity o" Pakistan 228
Banking Laws and Practices-BNK 601 VU #hese assets with appropriate %argins should $e in possession o" the $anks . '/,s with per"ected lien( >uarantees issued $y do%estic $anks . '/,s when recei!ed as collateral $y $anks . '/,s will $e treated at par with li*uid assets whereas+ "or guarantees issued $y "oreign $anks+ the issuing $anksE rating+ assigned either $y :tandard 0 Poors+ -oodyEs should $e K4E and a$o!e or e*ui!alent( #he inter-$ranch inde%nity . guarantee issued $y the $ankEs o!erseas $ranch in "a!or o" its sister $ranch in Pakistan+ would also $e treated at par with li*uid assets+ pro!ided the $ank is rated and a$o!e or e*ui!alent either $y :tandard 0 Poors+ -oodyEs ( N&"C means Non-Banking /inance Co%pany and includes a -odara$a+ Leasing Co%pany+ 1ousing /inance Co%pany+ ,n!est%ent Bank+ 'iscount 1ouse+ 4sset -anage%ent Co%pany and a Venture Capital Co%pany( Secured means e9posure $acked $y tangi$le security with appropriate %argins 3in cases where %argin has $een prescri$ed $y :tate Bank o" Pakistan+ appropriate %argin shall at least $e e*ual to the prescri$ed %argin8( )9posure without any tangi$le security is de"ined as clean( Tangible Securit# %eans li*uid assets 3as de"ined in these Prudential ;egulations8+ %ortgage o" land and $uilding+ hypothecation or charge on !ehicle+ $ut does not include hypothecation o" household goods+ etc( Minimum re:uirements %or consumer %inancing: Be"ore e%$arking upon or undertaking consu%er "inancing+ the $anks . '/,s shall i%ple%ent . "ollow the guidelines gi!en $elow( #he $anks . '/,s already in!ol!ed in the consu%er "inancing will ensure co%pliance with these guidelines within si9 %onths o" the date o" issuance o" Prudential ;egulations "or Consu%er /inancing ( C Banks . '/,s shall esta$lish separate ;isk -anage%ent capacity "or the purpose o" consu%er "inancing, which will $e suita$ly sta""ed $y personnel ha!ing su""icient e9pertise and e9perience in the "ield o" consu%er "inance . $usiness( !C #he $anks . '/,s shall prepare co%prehensi!e consu%er credit policy duly appro!ed $y their Board o" 'irectors 3in case o" "oreign $anks+ $y Country 1ead and )9ecuti!e . -anage%ent Co%%ittee8+ which shall interalia co!er loan ad%inistration+ including docu%entation+ dis$urse%ent and appropriate %onitoring %echanis%( #he policy shall e9plicitly speci"y the "unctions+ responsi$ilities and !arious sta"" positionsE powers . authority relating to appro!al . sanction o" consu%er "inancing "acility( *C /or e!ery type o" consu%er "inance acti!ity+ the $ank . '/, shall de!elop a speci"ic progra%( #he progra% shall include the o$Decti!e . *uantitati!e para%eters "or the eligi$ility o" the $orrower and deter%ining the %a9i%u% per%issi$le li%it per $orrower( 1C Banks . '/,s shall put in place an e""icient co%puter $ased -,: "or the purpose o" consu%er "inance+ which should $e a$le to e""ecti!ely cater to the needs o" consu%er "inancing port"olio and should $e "le9i$le enough to generate necessary in"or%ation reports used $y the %anage%ent "or e""ecti!e %onitoring o" the $ankEs . '/,Es e9posure in the area( 0C #he $anks . '/,s shall de!elop co%prehensi!e reco!ery procedures "or the delin*uent consu%er loans( #he reco!ery procedures %ay !ary "ro% product to product( 1owe!er+ distinct and o$Decti!e triggers should $e prescri$ed "or taking pre-planned en"orce%ent . reco!ery %easures( .C #he $anks . '/,s desirous o" undertaking consu%er "inance will $eco%e a %e%$er o" at least one Consu%er Credit ,n"or%ation Bureau( -oreo!er+ the $anks . '/,s %ay share in"or%ation . data a%ong the%sel!es or su$scri$e to other data$ases as they dee% "it and appropriate( 5C #he "inancial institutions starting consu%er "inancing are encouraged to i%part su""icient training on an ongoing $asis to their sta"" to raise their capa$ility regarding !arious aspects o" consu%er "inance 6C #he $anks . '/,s shall prepare standardi2ed set o" $orrowing and recourse docu%ents 3duly cleared $y their legal counsels8 "or each type o" consu%er "inancing( Copyright Virtual ni!ersity o" Pakistan 229
Banking Laws and Practices-BNK 601 VU O(erations: C Consu%er "inancing+ like other credit "acilities+ %ust $e su$Dect to the $ankEs . '/,Es risk %anage%ent process setup "or this particular $usiness( #he process %ay include+ identi"ying source o" repay%ent and assessing custo%ersE a$ility to repay+ his . her past dealings with the $ank . '/,+ the net worth and in"or%ation o$tained "ro% a Consu%er Credit ,n"or%ation Bureau !C 4t the ti%e o" granting "acility under !arious %odes o" consu%er "inancing+ $anks . '/,s shall o$tain a written declaration "ro% the $orrower di!ulging details o" !arious "acilities already o$tained "ro% other "inancial institutions( #he $anks . '/,s should care"ully study the details gi!en in the state%ent and allow "resh "inance . li%it only a"ter ensuring that the total e9posure in relation to the repay%ent capacity o" the custo%er does not e9ceed the reasona$le li%its as laid down in the appro!ed policies o" the $anks . '/,s( *C #he declaration will also help $anks . '/,s to a!oid e9posure against a person ha!ing %ultiple "acilities "ro% di""erent "inancial institutions on the strength o" an indi!idual source o" repay%ent( 1C Be"ore allowing any "acility+ the $anks . '/,s shall pre"era$ly o$tain credit report "ro% the Consu%er Credit ,n"or%ation Bureau o" which they are a %e%$er( #he report will $e gi!en due weight age while %aking credit decision( 0C ,nternal audit and control "unction o" the $ank . '/,+ apart "ro% other things+ should $e designed and strengthened so that it can e""iciently undertake an o$Decti!e re!iew o" the consu%er "inance port"olio "ro% ti%e to ti%e to assess !arious risks and possi$le weaknesses( .C #he internal audit should also assess the ade*uacy o" the internal controls and ensure that the re*uired policies and standards are de!eloped and practiced( ,nternal audit should also co%%ent on the steps taken $y the %anage%ent to recti"y the weaknesses pointed out $y the% in their pre!ious reports "or reducing the le!el o" risk( 5C #he $anks . '/,s shall ensure that their accounting and co%puter syste%s are well e*uipped to a!oid charging o" %ark-up on %ark-up( /or this purpose+ it should $e ensured that the %ark-up charged on the outstanding a%ount is kept separate "ro% the principal( 6C #he $anks . '/,s shall ensure that any repay%ent %ade $y the $orrower is accounted "or $e"ore applying %ark-up on the outstanding a%ount( /rudential Regulations %or Consumer "inancing REGU4AT?ON R+ "acilities to Related /ersons and UtiliHation o% Clean 4oans %or ?nitial /ublic O%%erings ;?/Os< "acilities to Related /ersons: #he consu%er "inance "acilities e9tended $y $anks . '/,s to their directors+ %aDor shareholders+ e%ployees and "a%ily %e%$ers o" these persons shall $e at ar%s length $asis and on nor%al ter%s and conditions applica$le "or other custo%ers o" the $anks . '/,s( #he $anks . '/,s shall ensure that the appraisal standards are not co%pro%ised in such cases and %arket rates are used "or these persons( #he "acilities e9tended to the e%ployees o" the $anks . '/,s as a part o" their co%pensation package under )%ployees :er!ice ;ules shall not "all in this category( UtiliHation o% Clean 4oans %or ?nitial /ublic O%%erings ?/Os: <hile the :tate BankEs intent is not to create any undue hindrance in the s%ooth "low o" consu%er "inancing to the $orrowers+ the $anks .'/,s are+ howe!er+ ad!ised to institute necessary checks+ so that clean loans are not used "or su$scription in ,nitial Pu$lic =""erings 3,P=s8( ,n this connection+ :tate Bank o" Pakistan suggests the "ollowing two %ini%u% re*uire%ents& 4t the ti%e o" sanction o" a clean consu%er loan . credit line+ the $anks . '/,s should o$tain an undertaking "ro% the client+ that the drawings "ro% the loan account will not $e used "or su$scription in an ,P=( #he $anks . '/,s should introduce an internal syste%+ where$y+ no che*ues+ dra"ts and . or pay%ent instructions will $e %ade "or an ,P= su$scription account "ro% a clean personal loan . credit line account( REGU4AT?ON R+! 4?M?T ON EK/OSURE AGA?NST 230 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU TOTA4 CONSUMER "?NANC?NG Banks . '/,s shall ensure that the aggregate e9posure under all consu%er "inancing "acilities at the end o" "irst year and second year o" the start o" their consu%er "inancing does not e9ceed @ ti%es and 7 ti%es o" their e*uity respecti!ely( /or su$se*uent years+ "ollowing li%its are placed on the total consu%er "inancing "acilities& REGU4AT?ON R+* TOTA4 "?NANC?NG "AC?4?T?ES TO &E COMMENSURATE 2?TA TAE ?NCOME <hile e9tending "inancing "acilities to their custo%ers+ the $anks . '/,s should ensure that the total install%ent o" the loans e9tended $y the "inancial institutions is co%%ensurate with %onthly inco%e and repay%ent capacity o" the $orrower( #his %easure would $e in addition to $anksE . '/,sE usual e!aluations o" each proposal concerning credit worthiness o" the $orrowers+ to ensure that the $anksE . '/,sE port"olio under consu%er "inance "ul"ills the prudential nor%s and instructions issued $y the :tate Bank o" Pakistan and does not i%pair the soundness and sa"ety o" the $ank . '/, itsel"( REGU4AT?ON R+1 GENERA4 RESERVE AGA?NST CONSUMER "?NANCE #he $anks . '/,s shall %aintain a general reser!e at least e*ui!alent to 1(BY o" the consu%er port"olio which is "ully secured and BY o" the consu%er port"olio which is unsecured+ to protect the% "ro% the risks associated with the econo%ic cyclical nature o" this $usiness( #he a$o!e reser!e re*uire%ent will+ howe!er+ $e %aintained "or the per"or%ing portion only o" consu%er port"olio( <e shall continue with the rest o" the regulations "or consu%er "inancing in the co%ing Lesson(
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VU LESSON 39
/RU7ENT?A4 REGU4AT?ONS "OR CONSUMER "?NANC?NG Contents to $e co!ered in this Lesson& o ;)> L4#,=N ;-B & B4; =N #;4N:/); =/ /4C,L,#,): /;=- =N) C4#)>=;I #= 4N=#1); #= 4V=,' CL4::,/,C4#,=N o ;)> L4#,=N ;-6& -4;>,N ;)Q ,;)-)N#: o ;)> L4#,=N: /=; C;)',# C4;': o ;)> L4#,=N =-1 o ;)> L4#,=N =-@ o ;)> L4#,=N =-? o ;)> L4#,=N =-7 o ;)> L4#,=N =-B o ;)> L4#,=N ;-6 -4S,- - C4;' L,-,# REGU4AT?ON R+6 CL4::,/,C4#,=N 4N' P;=V,:,=N,N> <e ha!e discussed so%e aspects.regulation o" consu%er "inancing in the pre!ious Lesson+ we shall continue with the rest o" regulations. aspects in this Lesson( REGU4AT?ON R+0 &AR ON TRANS"ER O" "AC?4?T?ES "ROM ONE CATEGOR= TO ANOTAER TO AVO?7 C4ASS?"?CAT?ON #he $anks . '/,s shall not trans"er any loan or "acility to $e classi"ied+ "ro% one category o" consu%er "inance to another+ to a!oid classi"ication( REGU4AT?ON R+. MARG?N REQU?REMENTS Banks . '/,s are "ree to deter%ine the %argin re*uire%ents on consu%er "acilities pro!ided $y the% to their clients taking into account the risk pro"ile o" the $orrower3s8 in order to secure their interests( 1owe!er+ this rela9ation shall not apply in case o" ite%s+ i%port o" which is $anned $y the >o!ern%ent( Banks . '/,s will continue to o$ser!e %argin restrictions on shares . #/Cs as per e9isting instructions under Prudential ;egulations "or Corporate . Co%%ercial Banking 3;-68( /urther+ the restrictions prescri$ed under paragraph 1(4 o" ;egulation ;-6 o" the Prudential ;egulations "or Corporate . Co%%ercial Banking will also $e applica$le in case o" Consu%er /inancing( :tate Bank o" Pakistan shall continue to e9ercise its powers "or "i9ation . reinstate%ent o" %argin re*uire%ents on consu%er "acilities $eing pro!ided $y $anks.'/,s "or !arious purposes+ as and when re*uired( REGU4AT?ONS "OR CRE7?T CAR7S /rudential Regulations %or Consumer "inancing M Credit Cards+ O+ to O+0 REGU4AT?ON O+ #he $anks . '/,s should take reasona$le steps to satis"y the%sel!es that card holders ha!e recei!ed the cards+ whether personally or $y %ail( #he $anks . '/,s should ad!ise the card holders o" the need to take reasona$le steps to keep the card sa"e and the P,N secret so that "rauds are a!oided(
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Banking Laws and Practices-BNK 601 VU REGU4AT?ON O+! Banks . '/,s shall pro!ide to the credit card holders+ the state%ent o" account at %onthly inter!als+ unless there has $een no transaction or no outstanding $alance on the account since last state%ent( REGU4AT?ON O+* Banks . '/,s shall $e lia$le "or all transactions not authori2ed $y the credit card holders a"ter they ha!e $een properly ser!ed with a notice that the card has $een lost . stolen( 1owe!er+ the $ankEs . '/,Es lia$ility shall $e li%ited to those a%ounts wrongly charged to the credit card holderEs account( ,n order to %itigate the risks in this respect+ the $anks . '/,s are encouraged to take insurance co!er against wrongly charged a%ounts+ "rauds+ etc( #he $ank.'/, shall+ howe!er+ not charge the $orrowersE account with any a%ount under the head o" Finsurance pre%iu%G 3$y whatsoe!er na%e called8 without o$taining consent o" each e9isting 0 prospecti!e custo%er in writing( ,n addition to o$taining consent in writing+ the $anks.'/,s %ay also use the "ollowing %odes "or o$taining prior consent o" their custo%ers pro!ided proper record is %aintained $y $anks.'/,s&iC Custo%erEs consent on recorded lines !ia out $ound.in $ound call center 3a"ter due !eri"ication8 iiC 4#- screens L screen pop up $e"ore conducting transaction and a"ter inputting pin code iiiC :igned consent ac*uired with credit card application or as separate "or% ivC ,V; 3,ntegrated Voice ;ecording8 REGU4AT?ON O+1 ,n case the cardholders %ake partial pay%ent+ the $anks . '/,s should take into account the partial pay%ent $e"ore charging ser!ice "ee . %ark-up a%ount on the outstanding . $illed a%ount so that the possi$ility o" charging e9cess a%ount o" %ark-up could $e a!oided( REGU4AT?ON O+0 'ue date "or pay%ent %ust $e speci"ically %entioned on the accounts state%ent( ," "ine . penalty is agreed to $e charged in case the pay%ent is not %ade $y the due date+ it should $e clearly %entioned in the agree%ent( /rudential Regulations %or Consumer "inancingM Credit Card+ R+5 E R+6 REGU4AT?ON R+5 MAK?MUM CAR7 4?M?T -a9i%u% unsecured li%it under credit card to a $orrower 3supple%entary cards shall $e considered part o" the principal $orrower8 shall generally not e9ceed ;s B00+000.( Banks . '/,s %ay+ howe!er+ assign a clean li%it $eyond ;s B00+000 $ut not in e9cess o" ;s @ %illion to their pri%e custo%ers who ha!e e9traordinary strong repay%ent capacity+ %oderate de$t $urden and a clean track record( But the aggregate outstanding in this respect should not e9ceed 10Y o" the total outstanding credit card port"olio at any point in ti%e( 1owe!er+ while a!ailing $ene"it o" this pro!ision+ $anks . '/,s would place on record well de"ined criteria "or ter%s MPri%e Custo%ersM and M-oderate 'e$t BurdenM appro!ed $y their Board o" 'irectors . Chie" )9ecuti!e( Banks . '/,s %ay also allow "inancing under the credit card sche%e in e9cess o" ;s B00+000.- 3up to ;s @ %illion8 to other custo%ers as well+ pro!ided the e9cess a%ount is appropriately secured according to the de"inition gi!en in Part 4 o" these regulations( #he loan secured against li*uid securities shall+ howe!er+ $e e9e%pted "ro% the a$o!e li%it( #he loans against the securities issued $y Central 'irectorate o" National :a!ings 3C'N:8 shall $e su$Dect to such li%its as are prescri$ed $y C'N: . /ederal >o!ern%ent . :tate Bank o" Pakistan "ro% ti%e to ti%e( /or Charge Cards+ pre-set spending li%its generated $y the standardi2ed syste%s+ as is the glo$al practice+ shall $e allowed( REGU4AT?ON R+6 C4ASS?"?CAT?ON AN7 /ROV?S?ON?NG #he credit card ad!ances shall $e classi"ied and pro!ided "or in the "ollowing %anner& Copyright Virtual ni!ersity o" Pakistan 233
Banking Laws and Practices-BNK 601 C4ASS?"?CAT?O N ; < Loss( 7ETERM?NANT ;!< <here %ark-up interest or TREATMENT O" ?NCOME ;*< . nreali2ed %ark-up . interest to $e
VU /ROV?S?ON TO &E MA7ET ;1< Pro!ision o" 100Y o" the di""erence
Principal is o!erdue $y Put in :uspense 4ccount and not to ;esulting "ro% the outstanding $alance 1C0 days or %ore "ro% $e credited to ,nco%e 4ccount o" principal less the a%ount o" li*uid the due date( e9cept when reali2ed in cash( securities with the $ank . '/,(
,t is clari"ied that the lenders are allowed to "ollow %ore conser!ati!e policies( /urther+ pro!isioning %ay $e created and %aintained $y the $ank . '/, on a port"olio $asis pro!ided that the pro!ision %aintained $y the $ank . '/, shall not $e less than the le!el re*uired under this ;egulation( 2e s)all continue 'it) ot)er categories o% consumer %inancing in t)e coming 4essonC
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Banking Laws and Practices-BNK 601 /RU7ENT?A4 REGU4AT?ONS O" S&/ 2e s)all continue 'it) t)e remaining regulations9 as(ects %or consumer %inancing: Contents to be covered in t)is 4esson: Regulations %or auto loans ;)> L4#,=N ;-5 ;)> L4#,=N ;-10 ;)> L4#,=N ;-11 ;)> L4#,=N ;-1@ ;)> L4#,=N ;-1? ;)> L4#,=N ;-17 ;)> L4#,=N =-6 ;)> L4#,=N =-6 ;)> L4#,=N =-C ;)> L4#,=N =-5 ;)> L4#,=N ;-17- Classi"ications REGU4AT?ONS "OR AOUS?NG "?NANCE ;)> L4#,=N ;-1B REGU4AT?ONS "OR AUTO 4OANS R+- to R+ *, O+. to O+- E R+ 1
VU LESSON 40
REGU4AT?ON R+#he ve)icles to be utiliHed %or commercial (ur(oses s)all not be covered under the Prudential ;egulations "or Consu%er /inancing( 4ny such "inancing shall ensure co%pliance with Prudential ;egulations "or Corporate . Co%%ercial Banking or Prudential ;egulations "or :-)s /inancing( #hese regulations shall only apply "or "inancing !ehicles "or personal use including light co%%ercial !ehicles also used "or personal purposes( REGU4AT?ON R+ 8 #he %a9i%u% tenure o" the auto loan "inance shall not eBceed seven #earsC REGU4AT?ON R+ <hile allowing auto loans+ the $anks . '/,s shall ensure that the %ini%u% down pay%ent does not "all $elow 10Y o" the !alue o" !ehicle( /urther+ $anks . '/,s shall e9tend auto loans only "or the e9-"actory ta9 paid price "i9ed $y the car %anu"acturers( ,n other words+ $anks . '/,s cannot "inance the pre%iu% charged $y the dealers and . or in!estors o!er and a$o!e the e9-"actory ta9 paid price o" cars+ "i9ed $y the %anu"acturers( REGU4AT?ON R+ ! ,n addition to any other security arrange%ent on the discretion o" the $anks. '/,s+ the !ehicles "inanced $y the $anks . '/,s shall $e properly secured $y way o" hypothecation( Pay%ents against the sale orders issued $y the %anu"acturers are allowed till the ti%e o" deli!ery o" the !ehicle su$Dect to the condition that pay%ent will directly $e %ade to the %anu"acturer . authori2ed dealer $y the $ank. '/, and upon deli!ery+ the !ehicle will i%%ediately $e hypothecated to the $ank. '/,( REGU4AT?ON R+ * #he $anks . '/,s shall ensure that the !ehicle re%ains (ro(erl# insured at all ti%es during the tenure o" the loan( REGU4AT?ON O+. Copyright Virtual ni!ersity o" Pakistan 235
Banking Laws and Practices-BNK 601 VU #he clause o% re(ossession in case o% de%ault should $e clearly stated in the loan agree%ent %entioning speci"ic de"ault period a"ter which the repossession can $e initiated( #he repossession e9penses charged to the $orrower shall not $e %ore than actual incurred $y the $ank . '/,( 1owe!er+ the %a9i%u% a%ount o" repossession charges shall $e listed in the schedule o" charges pro!ided to custo%ers( #he $anks . '/,s shall de!elop an appropriate procedure "or repossession o" the !ehicles and shall ensure that the procedure is strictly in accordance with law( REGU4AT?ON O+5 4 detailed repay%ent schedule should $e pro!ided to the $orrower at the outset( <here alterations $eco%e i%%inent $ecause o" late pay%ents or prepay%ents and the install%ent a%ount or period changes signi"icantly+ the re!ised schedule should $e pro!ided to the $orrower at the earliest con!enience o" the $ank . '/, $ut not later than 1B days o" the change( /urther+ e!en in case o" insigni"icant changes+ upon the re*uest o" the custo%er+ the $ank . '/, shall pro!ide hi% re!ised repay%ent schedule "ree o" cost( REGU4AT?ON O+6 #he $anks . '/,s desirous o" %inancing t)e (urc)ase o% used cars shall (re(are uni%orm guidelines "or deter%ining the !alue o" the used !ehicles( 1owe!er+ in no case the $ank . '/, shall "inance the cars older t)an %ive #earsC REGU4AT?ON O+#he $anks . '/,s should ensure that a good nu%$er o" authori2ed auto dealers are placed at their panel to eli%inate the chances o" collusion or other unethical practices( REGU4AT?ON R+ 1+ Classi%ications #he auto loans shall $e classi"ied and pro!ided "or in the "ollowing %anner&
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REGU4AT?ONS "OR AOUS?NG "?NANCEM R+ 0 to R+! , E R+!! Classi%ications REGU4AT?ON R+ 0 Banks . '/,s shall deter%ine the housing "inance li%it+ $oth in ur$an and rural areas+ in accordance with their internal credit policy+ credit worthiness and loan repay%ent capacity o" the $orrowers( 4t the sa%e ti%e+ while deter%ining the credit worthiness and repay%ent capacity o" the prospecti!e $orrower+ $anks . '/,s shall ensure that the total %onthly a%orti2ation pay%ents o" consu%er loans+ inclusi!e o" housing loan+ should not e9ceed B0Y o" the net disposa$le inco%e o" the prospecti!e $orrower( Banks . '/,s will not allow housing "inance purely "or the purchase o" land . plotsJ rather+ such "inancing would $e e9tended "or the purchase o" land . plot and construction on it( 4ccordingly+ the sanctioned loan li%it+ assessed on the $asis o" repay%ent capacity o" the $orrower+ !alue o" land . plot and cost o" construction on it etc(+ should $e dis$ursed in tranches+ i(e( up to a %a9i%u% o" B0Y o" the loan li%it can $e dis$ursed "or the purchase o" land. plot+ and the re%aining a%ount $e dis$ursed "or construction there-upon( /urther+ the lending $ank . '/, will take a realistic construction schedule "ro% the $orrower $e"ore allowing dis$urse%ent o" the initial loan li%it "or the purchase o" land . plot( Banks . '/,s %ay allow housing "inance "acility "or construction o" houses against the security o" land . plot already owned $y their custo%ers( 1owe!er+ the lending $ank . '/, will ensure that the loan a%ount is utili2ed strictly "or the construction purpose and loan is dis$ursed in tranches as per construction schedule( Loans against the security o" e9isting land . plot+ or "or the purchase o" new piece o" land . plot+ "or co%%ercial and industrial purposes %ay $e allowed( But such loans will $e treated as Co%%ercial Loans+ which will $e co!ered either under Prudential ;egulations "or Corporate . Co%%ercial Banking or Prudential ;egulations "or :-)s /inancing( Copyright Virtual ni!ersity o" Pakistan 237
Banking Laws and Practices-BNK 601 VU Banks . '/,s %ay allow 1ousing Loans in the rural areas pro!ided all rele!ant guidelines.regulations on the su$Dect are co%plied with $y the%( <e shall continue with the rest o" the regulations "or consu%er "inancing in the co%ing Lesson(
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<e shall continue with the re%aining regulations. aspects "or consu%er "inancing in this Lesson& Contents to be covered in t)is 4esson: REGU4AT?ONS "OR AOUS?NG "?NANCE REGU4AT?ON R+ 0 REGU4AT?ON R+ . REGU4AT?ON R+ 5 REGU4AT?ON R+ 6 REGU4AT?ON R+ REGU4AT?ON R+!8 REGU4AT?ON R+! REGU4AT?ON R+!! REGU4AT?ONS "OR /ERSONA4 4OANS ?NC4U7?NG 4OANS "OR TAE /URCAASE O" CONSUMER 7URA&4ES REGU4AT?ONS R+!* REGU4AT?ONS R+!1 REGU4AT?ONS R+!0 REGU4AT?ONS R+!. REGU4AT?ONS R+!5 REGU4AT?ONS "OR AOUS?NG "?NANCEM R+ 0 to R+! , E R+!! REGU4AT?ON R+ 0 Banks . '/,s shall deter%ine the housing "inance li%it+ $oth in ur$an and rural areas+ in accordance with their internal credit (olic#, credit 'ort)iness and loan repay%ent capacity o" the $orrowers( 4t the sa%e ti%e+ while deter%ining the credit worthiness and repay%ent capacity o" the prospecti!e $orrower+ $anks . '/,s shall ensure that the total %onthly a%orti2ation pay%ents o" consu%er loans+ inclusi!e o" housing loan+ should not e9ceed B0Y o" the net disposa$le inco%e o" the prospecti!e $orrower( Banks . '/,s will not allow housing "inance purely "or the purchase o" land . plotsJ rather+ such "inancing would $e e9tended "or the purchase o" land . plot and construction on it( 4ccordingly+ the sanctioned loan li%it+ assessed on the $asis o" repay%ent capacity o" the $orrower+ !alue o" land . plot and cost o" construction on it etc(+ should $e dis$ursed in tranches+ i(e( up to a %a9i%u% o" B0Y o" the loan li%it can $e dis$ursed "or the purchase o" land. plot+ and the re%aining a%ount $e dis$ursed "or construction there-upon( /urther+ the lending $ank . '/, will take a realistic construction schedule "ro% the $orrower $e"ore allowing dis$urse%ent o" the initial loan li%it "or the purchase o" land . plot( Banks . '/,s %ay allow housing "inance "acility "or construction o" houses against the security o" land . plot already owned $y their custo%ers( 1owe!er+ the lending $ank . '/, will ensure that the loan a%ount is utili2ed strictly "or the construction purpose and loan is dis$ursed in tranches as per construction schedule( Loans against the security o% eBisting land . plot+ or "or the purchase o" new piece o" land . plot+ "or co%%ercial and industrial purposes %ay $e allowed( But such loans will $e treated as Co%%ercial Loans+ which will $e co!ered either under Prudential ;egulations "or Corporate . Co%%ercial Banking or Prudential ;egulations "or :-)s /inancing( Banks . '/,s %ay allow 1ousing Loans in the rural areas pro!ided all rele!ant guidelines.regulations on the su$Dect are co%plied with $y the%( REGU4AT?ON R+ . #he housing "inance "acility shall $e pro!ided at a %a9i%u% debt+e:uit# ratio o% 60: 0 Copyright Virtual ni!ersity o" Pakistan 239
Banking Laws and Practices-BNK 601 VU REGU4AT?ON R+ 5 Banks . '/,s are "ree to e9tend mortgage loans "or housing+ "or a period not eBceeding t'ent# #ears( Banks . '/,s should $e %ind"ul o" ade*uate asset + liabilit# matc)ingC REGU4AT?ON R+ 6 #he house "inanced $y the $ank . '/, shall $e %ortgaged in $ankEs . '/,Es "a!our $y way o" e:uitable or registered mortgage( REGU4AT?ON R+ Banks . '/,s shall either engage (ro%essional eB(ertise or arrange su%%icient training "or their concerned o%%icials to evaluate t)e (ro(ert#+ assess the genuineness and integrity o" the title docu%ents+ etc( ,t %ay+ howe!er+ $e noted that the re*uire%ent o" "ull-scope and desk-top e!aluation+ as re*uired under ;-C and ;-11 o" Prudential ;egulations "or Corporate . Co%%ercial Banking and :-)s /inancing respecti!ely+ will not $e applica$le on housing "inance( REGU4AT?ON R+!8 #he $ankEs . 7"?3s management s)ould (ut in (lace a mec)anism to monitor conditions in t)e real estate %arket 3or other product %arket8 at least on *uarterly $asis to ensure that its policies are aligned to current %arket conditions( REGU4AT?ON R+! Banks . '/,s are encouraged to develo( %loating rate (roducts "or e9tending housing "inance+ there$y %anaging interest rate risk to a!oid its ad!erse e""ects( Banks . '/,s are also encouraged to de!elop inhouse syste% to stress test their housing port"olio against ad!erse %o!e%ents in interest rates as also %aturity %is%atches( REGU4AT?ON R+!! #he %ortgage loans shall $e classi"ied and pro!ided "or in the "ollowing %anner&
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REGU4AT?ONS "OR /ERSONA4 4OANS ?NC4U7?NG 4OANS "OR TAE /URCAASE O" CONSUMER 7URA&4ES+ R+!* to R+!5 Copyright Virtual ni!ersity o" Pakistan 241
Banking Laws and Practices-BNK 601 VU REGU4AT?ON R+!* #he clean li%it per person "or personal loans will generall# not eBceed Rs 088,8889+C Banks . '/,s %ay assign a clean li%it $eyond ;s B00+000 $ut not in eBcess o% Rs ! million to their (rime customers who ha!e e9traordinary strong re(a#ment ca(acit#+ %oderate de$t $urden and a clean trac$ record( But aggregate outstanding in this respect should not e9ceed 10Y o" the total outstanding personal loans at any point in ti%e 1owe!er+ while a!ailing $ene"it o" this pro!ision+ $anks . '/,s would place on record well de"ined criteria "or ter%s MPri%e Custo%ersM and M-oderate 'e$t BurdenM appro!ed $y their Board o" 'irectors . Chie" )9ecuti!e( Banks . '/,s %ay also allow "inancing under Personal Loans in e9cess o" ;s B00+000 3 u( to Rs( ,888,888< to ot)er customers as well+ pro!ided the loan is a((ro(riatel# secured according to the de"inition gi!en in Part 4 o" these regulations( #he loan secured against li*uid securities shall+ howe!er+ $e e9e%pted "ro% this li%it( #he loans against the securities issued $y Central 'irectorate o" National :a!ings 3C'N:8 shall $e su$Dect to such li%its as are prescri$ed $y C'N: . /ederal >o!ern%ent . :tate Bank o" Pakistan "ro% ti%e to ti%e( REGU4AT?ON R+!1 ,n cases+ where the loan has $een e9tended to purchase so%e durable goods 9 items+ including personal co%puters and accessories thereo"+ the sa%e 'ill be )#(ot)ecated 'it) t)e ban$ . '/, $esides other securities+ which the $ank . '/, %ay re*uire on its own( REGU4AT?ON R+!0 #he %a9i%u% tenure o" the loan shall not eBceed 0 #earsC 1owe!er+ this period %ay $e e9tended to 5 #ears %or loans . ad!ances gi!en %or educational (ur(oses+ pro!ided that dis$urse%ent o" such loans shall directly $e %ade $y the $ank . '/, to t)e educational institution and the $orrower shall not $e allowed to utili2e . withdraw cash directly "ro% the $ank . '/, under this head "or any other purpose( #he %a9i%u% tenure o" the loan shall not e9ceed B years( 1owe!er+ this period %ay $e e9tended to 6 years "or loans . ad!ances gi!en "or educational purposes+ pro!ided that dis$urse%ent o" such loans shall directly $e %ade $y the $ank . '/, to the educational institution and the $orrower shall not $e allowed to utili2e . withdraw cash directly "ro% the $ank . '/, under this head "or any other purpose( REGU4AT?ON R+!. ,n case o" ;unning /inance . ;e!ol!ing /inance+ it shall $e ensured that at least 1BY o" the %a9i%u% utili2ation o" the loan during the year is cleaned up $y the $orrower "or a %ini%u% period o" one week( ,n case the clean up is not %ade $y the $orrower+ the loan will $e appropriately classi"ied( 1owe!er+ $anks . '/,s who re*uire their custo%ers to repay a %ini%u% a%ount each %onth+ will $e considered co%pliant with this regulation su$Dect to the condition that the aggregate cu%ulati!e %onthly install%ents e9ceed the 1BY clean up re*uire%ent and accordingly the loans where the speci"ied %ini%u% repay%ents are $eing %ade $y the $orrowers regularly+ will not re*uire classi"ication under this regulation( REGU4AT?ON R+!5 #he personal loans shall $e classi"ied and pro!ided "or in the "ollowing %anner&
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/RU7ENT?A4 REGU4AT?ONS "OR SMA44 AN7 ME7?UM ENTER/R?SES "?NANC?NG ?ntroduction: Keeping in !iew the i%portant role o" :%all and -ediu% )nterprises 3:-)s8 in the econo%ic de!elop%ent o" Pakistan and to "acilitate and encourage the "low o" $ank credit to this sector+ a separate set o" Prudential ;egulations speci"ically "or :-) sector has $een issued $y :tate Bank o" Pakistan( #his separate set o" regulations+ speci"ically tailored "or :-)s+ is ai%ed at encouraging $anks . '/,s to de!elop new "inancing techni*ues and inno!ati!e products which can %eet the "inancial re*uire%ents o" :-)s and pro!ide a !ia$le and growing lending outlet "or $anks . '/,s( Banks . '/,s should recogni2e that success in :-) lending re*uires %uch %ore e9tensi!e in!ol!e%ent with the :-)s than the traditional lender-$orrower relationship en!isages( #he $anks . '/,s are+ thus+ encouraged to work in close association with :-)s( #he $anks . '/,s should assist and guide the :-)s to de!elop appropriate syste%s and e""ecti!ely %anage their resources and risks( #he $anks . '/,s are encouraged to prepare a lending progra% 3including detailed eligi$ility criteria8 "or each speci"ic su$-sector o" :-) in which they want to take e9posure in a signi"icant %anner( /or this purpose+ the $anks . '/,s %ay conduct . arrange sur!eys and research to deter%ine the status and potential o" speci"ic :-) su$-sectors( ,t is e9pected that $anks . '/,s would prepare co%prehensi!e guidelines . %anuals and put in place suita$le %echanis% . structure+ aided $y proper -,:+ to carry out the acti!ities related to :-) "inancing in an e""ecti!e way( #his should+ howe!er+ not stop $anks . '/,s Copyright Virtual ni!ersity o" Pakistan 243
Banking Laws and Practices-BNK 601 VU "ro% lending to :-)s $e"ore undertaking the steps %entioned a$o!e as the $anks . '/,s %ay start so"t lending operations or test %arketing ca%paigns+ as they "eel appropriate+ to gain e9perience and necessary know how( #he "actors %entioned a$o!e gain %ore i%portance and $eco%e critical "or the success o" a $ank . '/, in :-) lending+ as the e9posure o" the $ank . '/, on :-)s $eco%es a signi"icant portion o" its loan port"olio( :tate Bank o" Pakistan encourages $anks . '/,s to lend to :-)s on the $asis o" assets con!ersion cycle and "uture cash "lows( 4 pro$le%+ which the $anks . '/,s %ay encounter in this respect+ is the lack o" ade*uate in"or%ation( ,n order to o!erco%e this pro$le%+ $anks . '/,s %ay also like to prepare general industry cash "lows and then adDust those cash "lows "or the speci"ic $orrowers keeping in !iew their conditions and other "actors in!ol!ed( 4s %entioned a$o!e+ presently %ost o" the :-)s in Pakistan lack sophistication to ha!e relia$le and su""icient data and "inancial in"or%ation( ,n order to capture this data and in"or%ation+ $anks . '/,s will need to assist and guide their :-) custo%ers( #he $anks . '/,s %ay co%e up with the %ini%u% in"or%ation re*uire%ents and standardi2ed "or%ats "or this purpose as per their own discretion( /or $etter understanding and to "acilitate their :-) custo%ers+ $anks. '/,s are encouraged to translate their loan application "or%ats and $rochures in rdu and other regional languages( Banks . '/,s should reali2e that delay in processing the cases %ight "rustrate the :-)s( Banks . '/,s are there"ore encouraged to process the loan cases e9peditiously and con!ey the decision to the :-) $orrowers as early as possi$le ,n order to encourage close coordination o" the o""icials o" the $anks . '/,s and :-)s+ the $anks . '/,s %ay re*uire the concerned dealing o""icer to regularly !isit the $orrower( /or this purpose+ at a %ini%u%+ the dealing o""icer %ay $e re*uired to pay at least one *uarterly !isit and docu%ent the state o" a""airs o" the :-)( ,n addition+ an o""icer senior to the ones conducting these regular !isits %ay also !isit the :-) at least once in a year( #he $anks %ay+ at their own discretion+ correlate the "re*uency o" !isits with their total e9posure to the :-) $orrower( :tate Bank o" Pakistan will closely %onitor the situation on an ongoing $asis and work proacti!ely with $anks . '/,s to %ake :-) "inancing a success( 'uring this process+ we will keep on re!iewing regulatory "ra%ework to ensure that any i%pedi%ent is i%%ediately re%o!ed while ensuring that $anks . '/,s o$ser!e due prudence and necessary o!ersight( 7e%initions: &an$ %eans a $anking co%pany as de"ined in Banking Co%panies =rdinance+ 156@( &orro'er %eans a :-) on which a $ank . '/, has taken any e9posure during the course o" $usiness( Cor(orate Card %eans credit card issued to the e%ployees o" a :-) where the repay%ent is to $e %ade $y the said :-)( Contingent liabilit# means: ;a<C 4 possi$le o$ligation that arises "ro% past e!ents and whose e9istence will $e con"ir%ed only $y the occurrence or non- occurrence o" one or %ore uncertain "uture e!ents not wholly within the control o" the enterpriseJ or ;b<C 4 present o$ligation that arises "ro% past e!ents $ut is not recogni2ed $ecause& ,t is not pro$a$le that an out"low o" resources e%$odying econo%ic $ene"its will $e re*uired to settle the o$ligationJ or iiC #he a%ount o" the o$ligation cannot $e %easured with su""icient relia$ilityJ and includes letters o" credit+ letters o" guarantee+ $id $onds . per"or%ance $onds+ ad!ance pay%ent guarantees and underwriting co%%it%ents( Small and Medium Enter(rise ;SME< %eans an entity+ ideally not a pu$lic li%ited co%pany+ which does not e%ploy %ore than @B0 persons 3i" it is %anu"acturing.ser!ice concern8 and B0 persons 3i" it is trading concern8 and also "ul"ills the "ollowing criteria o" either KaE and KcE or K$E and KcE as rele!ant& ;a<C 4 trading.ser!ice concern with total assets at cost e9cluding land and $uilding up to ;s B0 %illion( ;b<C 4 %anu"acturing concern with total assets at cost e9cluding land and $uilding upto ;s 100 %illion( ;c<C 4ny concern 3trading+ ser!ice or %anu"acturing8 with net sales not e9ceeding ;s ?00 %illion as per latest "inancial state%ents( 244 Copyright Virtual ni!ersity o" Pakistan iC
Banking Laws and Practices-BNK 601 VU ;d<C 4n ,ndi!idual+ i" he or she %eets the a$o!e criteria+ can also $e categori2ed as an :-)( <e shall continue with regulations "or :-)s in the ne9t Lesson(
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Banking Laws and Practices-BNK 601 /RU7ENT?A4 REGU4AT?ONS O" S&/ /RU7ENT?A4 REGU4AT?ONS "OR SMA44 AN7 ME7?UM ENTER/R?SES "?NANC?NG ,n this Lesson+ we shall co!er the "ollowing& Prudential ;egulations "or s%all and %ediu% enterprises "inance( Prudential ;egulations "or Corporate. Co%%ercial Banking
VU LESSON 42
/irst o" all we gi!e hereunder an o!er!iew o" prudential regulations "or s%all 0 %ediu% enterprises "inancing( REGU4AT?ONS "OR SMA44 E ME7?UM ENTER/R?SES "?NANC?NG: REGU4AT?ON R+ SOURCE AN7 CA/AC?T= O" RE/A=MENT AN7 CASA "4O2 &AC>E7 4EN7?NG REGU4AT?ON R+! Personal guarantees REGU4AT?ON R+* Li%it on clean "acilities REGU4AT?ON R+1 :ecurities REGU4AT?ON R+0 -argin re*uire%ents REGU4AT?ON R+. Per party e9posure li%it REGU4AT?ON R+5 4ggregate e9posure o" a $ank . d"i on s%e sector T)e aggregate eB(osure o% a ban$ . '/, on :-) sector shall not e9ceed the li%its as s(eci%ied belo'&
REGU4AT?ON R+6 -ini%u% conditions "or taking e9posure REGU4AT?ON R+Proper utili2ation o" loan REGU4AT?ON R+ 8 ;estriction on "acilities to related parties Regulation R+ C4ASS?"?CAT?ON AN7 /ROV?S?ON?NG "OR ASSETS, As /rescribed in AnneBure+ 246 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU L=4N: . 4'V4NC): Banks . '/,s shall o$ser!e the prudential guidelines gi!en at 4nne9ure-,,, in the %atter o" classi"ication o" their :-) asset port"olio and pro!isioning there-against(
4ll "inancing "acilities 3including short+ %ediu% and long ter%8
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Note& (he benefit of +,- is allowed against )P#s of over $s ! million only and from *ecember ./% 011" against )P#s of over $s /1 million only. &lassified loans 2 advances that have been guaranteed by the 3overnment would not require provisioning% however% mar' up 2 interest on such accounts to be ta'en to 4emorandum Account instead of ncome Account. /rudential Regulations %or Cor(orate9 Commercial &an$ing 7e%initions: L>e# EBecutiveP %eans key e9ecuti!es o" $anks.'/,s and includes the "ollowing "unctional responsi$ilities "or the present&;a<C 4ny e9ecuti!e+ acting as second to C)= including Chie" =perating =""icer+ 'eputy -anaging 'irector or $y whate!er na%e called ;b<C Chie" /inancial =""icer . 1ead o" /inance . 1ead o" 4ccounts ;c<C 1ead o" ,nternal 4udit ;d<C Country #reasurer L>e# EBecutiveP ;e<C 1ead o" Credit. ;isk -anage%ent ;%<C 1ead o" =perations ;g<C 1ead o" Co%pliance ;)<C 1ead o" 1u%an ;esource ;i<C 1ead o" ,n"or%ation #echnology ;j<C 1ead o" ,sla%ic Banking Regulations Regulation r+ Li%it on e9posure to a single person Regulation r+! Li%it on e9posure against contingent lia$ilities Regulation r+* 248 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU -ini%u% conditions "or taking e9posure Regulation r+1 Li%it on e9posure against nsecured "inancing "acilities Regulation r+0 Linkage $etween "inancial indicators o" the $orrower and total e9posure "ro% "inancial institutions Regulation r+. )9posure against shares . t"cs 4nd ac*uisition o" shares Regulation r+5 >uarantees Regulation r+6 Classi"ication and pro!isioning "or assets Regulation r+4ssu%ing o$ligations on $ehal" o" n$"cs Banks . '/,s shall not issue any guarantee or letter o" co%"ort nor assu%e any o$ligation whatsoe!er in respect o" deposits+ sale o" in!est%ent certi"icates+ issue o" co%%ercial papers+ or $orrowings o" any non-$anking "inance co%pany( Regulation r+ 8 /acilities to pri!ate li%ited co%pany Regulation r+ Pay%ent o" di!idend Regulation r+ ! -onitoring Regulation r+ * -argin re*uire%ents Regulation g+ Corporate go!ernance . $oard =" directors and %anage%ent #he "ollowing guidelines are re*uired to $e "ollowed $y $anks . '/,s incorporated in Pakistan( #hey will also "ollow KCode o" Corporate >o!ernanceE issued $y the :ecurities 0 )9change Co%%ission o" Pakistan 3:)CP8 so long as any pro!ision thereo" does not con"lict with any pro!ision o" the Banking Co%panies =rdinance+ 156@+ Prudential ;egulations and the instructions . guidelines issued $y the :tate Bank o" Pakistan( /oreign $anks are re*uired to adhere to these guidelines where!er "easi$le and applica$le( 1owe!er+ they need not necessarily seek appro!al o" their Board o" 'irectors+ as stipulated $elow in the case o" local $anks . '/,s: "?T AN7 /RO/ER TEST -- #he F/it and Proper #estG 3/P#8 is applica$le on the sponsors 3$oth indi!idual 0 co%panies8 who apply "or a co%%ercial $anking license+ the in!estors ac*uiring strategic.controlling stake in the $anks.'/,s+ %aDor shareholders o" the $anking co%panies and "or the appoint%ent o" 'irectors+ C)=+ and Key )9ecuti!es o" the $anks.'/,s( #he "itness 0 propriety will $e assessed on the "ollowing $road ele%ents 34nne9ure V,,-B8& Contd((( aC ,ntegrity+ 1onesty 0 ;eputation bC #rack ;ecord cC :ol!ency 0 ,ntegrity dC Quali"ication 0 )9perience eC Con"lict o" ,nterest %C =thers !C /irst three ele%ents are applica$le to all categories o" indi!iduals+ whereas the last three ele%ents will $e considered while assessing the /P# o" 'irectors+ C)= 0 Key )9ecuti!es o" $anks.'/,s( Copyright Virtual ni!ersity o" Pakistan 249
Banking Laws and Practices-BNK 601 VU !C ,n addition to a$o!e re*uire%ents+ sponsors and strategic in!estors are e!aluated respecti!ely in ter%s o" F>uidelines 0 Criteria "or setting up o" a Co%%ercial BankG 0 FCriteria "or )sta$lish%ent o" ,sla%ic Co%%ercial BanksG issued $y :BP and Code o" Corporate >o!ernance issued $y :)CP( *( #he sponsors+ the strategic in!estors+ and appoint%ent o" the 'irectors and C)= re*uire prior clearance in writing "ro% :BP( #he C)= and Key )9ecuti!es shall $e "ull ti%e e%ployees o" the $ank.'/,( #he 'irectors and C)= will not assu%e the charge o" their respecti!e o""ices until their appoint%ents are appro!ed in writing $y :BP( *C 4ll the re*uests "or seeking appro!al o" :BP "or appoint%ent o" 'irectors 0 C)= o" the $anks.'/,s should $e routed through respecti!e $anks.'/,s along with in"or%ation on 4nne9ures-V,-4 0 V,-B( 1C #he appoint%ent o" Key )9ecuti!es will not re*uire prior clearance o" :BP( 1owe!er+ the $anks.'/,s %ust the%sel!es ensure while appointing Key )9ecuti!es that they *uali"y /P# in letter and spirit( 0C #he sponsors are re*uired to seek prior appro!al o" :BP along with the in"or%ation at 4nne9ureV,-B and other in"or%ation as re*uired in the F>uidelines 0 Criteria "or :etting up a Co%%ercial BankG andG Criteria "or )sta$lish%ent o" ,sla%ic Co%%ercial BanksG( #he strategic in!estors conte%plating to ac*uire strategic.controlling stake are re*uired to seek prior appro!al "ro% :BP either directly or through the concerned depart%ent.-inistry o" >o!ern%ent e9ecuting strategic sale transaction o" the $ank as re*uired and pro!ided in the transaction structure( #he $ank should also ensure to gi!e prior inti%ation to :BP $e"ore dealing with any in!estors.$ank.institutions.person "or sale.purchase o" sponsors. strategic shares and seek appro!al o" :BP "or conducting due diligence o" $ank.'/, in ter%s o" BP' Circular No( C o" @00?( .( #he %aDor shareholders are re*uired to seek prior appro!al in writing "ro% :BP "or ac*uiring BY or %ore shares along-with in"or%ation on 4nne9ure- V,-B+ with proper Dusti"ication "or holding %ore than BY shares o" the paid up capital( 4ll the $anks.'/,s are re*uired to ensure that %aDor shareholders ha!e sought such an appro!al "ro% :BP and place it on record( 5C /it 0 Proper #est prescri$ed in the guideline is continuous in nature( 4ll persons su$Dect to /P# should i%%ediately su$%it any change in the in"or%ation already su$%itted 3at the ti%e o" clearance8 either through Co%pany :ecretary or 1u%an ;esources 'epart%ent to Banking Policy and ;egulations 'epart%ent( 5C Violation o% t)e instructions, circumvention, concealment, misre(orting and dela# in submission o% in%ormation to S&/ ma# result in 'it)dra'al o% S&/ a((roval, besides (enal action under t)e (rovisions o% &CO, -.!C Regulation g+! 'ealing with directors+ %aDor share-holders 4nd e%ployees o" the $anks . d"is Regulation g+* Contri$utions and donations "or charita$le+ social+ educational and pu$lic wel"are purposes Regulation g+1 Credit rating
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<ith the introduction o" prudential regulations+ a healthy lending and $orrowing culture has $een de!eloped in our $anking sector(
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#he :tate Bank o" Pakistan has issued guidelines "or $anks with a !iew to take necessary re%edial %easures and installs re*uired syste%s so as to sa"eguard against undue risk e9posures $y de!eloping necessary risk %anage%ent %echanis%( #he guidelines o" :BP are gi!en in the "ollowing paragraphs& Ris$: /or the purpose o" these guidelines "inancial risk in $anking organi2ation is possi$ility that the outco%e o" an action or e!ent could $ring up ad!erse i%pacts( :uch outco%es could either result in a direct loss o" earnings . capital or %ay result in i%position o" constraints on $ankEs a$ility to %eet its $usiness o$Decti!es( :uch constraints pose a risk as these could hinder a $ankHs a$ility to conduct its ongoing $usiness or to take $ene"it o" opportunities to enhance its $usiness( Ris$ Management: ;isk -anage%ent is a discipline at the core o" e!ery "inancial institution and enco%passes all the acti!ities that a""ect its risk pro"ile( ,t in!ol!es identi"ication+ %easure%ent+ %onitoring and controlling risks to ensure that& aC #he indi!iduals who take or %anage risks clearly understand it( bC #he organi2ationEs ;isk e9posure is within the li%its esta$lished $y Board o" 'irectors( cC ;isk taking 'ecisions are in line with the $usiness strategy and o$Decti!es set $y B='( dC #he e9pected payo""s co%pensate "or the risks taken eC ;isk taking decisions are e9plicit and clear( %C :u""icient capital as a $u""er is a!aila$le to take risk #he acceptance and %anage%ent o" "inancial risk is inherent to the $usiness o" $anking and $anksE roles as "inancial inter%ediaries( ;isk %anage%ent as co%%only percei!ed does not %ean %ini%i2ing riskJ rather the goal o" risk %anage%ent is to o(timiHe ris$+re'ard trade +o%%C -- Notwithstanding the "act that $anks are in the $usiness o" taking risk+ it should $e recogni2ed that an institution need not engage in $usiness in a %anner that unnecessarily i%poses risk upon it& nor it should a$sor$ risk that can $e trans"erred to other participants( ;ather it should accept those risks that are uni*uely part o" the array o" $ankEs ser!ices( ,n e!ery "inancial institution+ risk %anage%ent acti!ities $roadly take place si%ultaneously at "ollowing di""erent hierarchy le!els( aC Strategic level: bC Macro 4evel: cC Micro 4evel: aC :trategic le!el& ,t enco%passes risk %anage%ent "unctions per"or%ed $y senior %anage%ent and B='( /or instance de"inition o" risks+ ascertaining institutions risk appetite+ "or%ulating strategy and policies "or %anaging risks and esta$lish ade*uate syste%s and controls to ensure that o!erall risk re%ain within accepta$le le!el and the reward co%pensate "or the risk taken( bC -acro Le!el& ,t enco%passes risk %anage%ent within a $usiness area or across $usiness lines( >enerally the risk %anage%ent acti!ities per"or%ed $y %iddle %anage%ent or units de!oted to risk re!iews "all into this category( cC -icro Le!el& ,t in!ol!es K=n-the-lineE risk %anage%ent where risks are actually created( #his is the risk %anage%ent acti!ities per"or%ed $y indi!iduals who take risk on organi2ationEs $ehal" such as "ront o""ice and loan origination "unctions( #he risk %anage%ent in those areas is con"ined to "ollowing operational procedures and guidelines set $y %anage%ent( Ris$ Management %rame'or$ 4 risk %anage%ent "ra%ework enco%passes the scope o" risks to $e %anaged+ the process.syste%s and procedures to %anage risk and the roles and responsi$ilities o" indi!iduals in!ol!ed in risk %anage%ent( Copyright Virtual ni!ersity o" Pakistan 257
Banking Laws and Practices-BNK 601 VU #he "ra%ework should $e co%prehensi!e enough to capture all risks a $ank is e9posed to and ha!e "le9i$ility to acco%%odate any change in $usiness acti!ities( 4n e""ecti!e risk %anage%ent "ra%ework includes& aC Clearly de"ined risk %anage%ent policies and procedures co!ering risk identi"ication+ acceptance+ %easure%ent+ %onitoring+ reporting and control( bC 4 well constituted organi2ational structure de"ining clearly roles and responsi$ilities o" indi!iduals in!ol!ed in risk taking as well as %anaging it( Banks+ in addition to risk %anage%ent "unctions "or !arious risk categories %ay institute a setup that super!ises o!erall risk %anage%ent at the $ank( :uch a setup could $e in the "or% o" a separate depart%ent or $ankEs ;isk -anage%ent Co%%ittee 3;-C8 could per"or% such "unction( #he structure should $e such that ensures e""ecti!e %onitoring and control o!er risks $eing taken( #he indi!iduals responsi$le "or re!iew "unction 3;isk re!iew+ internal audit+ co%pliance etc8 should $e independent "ro% risk taking units and report directly to $oard or senior %anage%ent who are also not in!ol!ed in risk taking( cC #here should $e an e""ecti!e %anage%ent in"or%ation syste% that ensures "low o" in"or%ation "ro% operational le!el to top %anage%ent and a syste% to address any e9ceptions o$ser!ed( #here should $e an e9plicit procedure regarding %easures to $e taken to address such de!iations( dC #he "ra%ework should ha!e a %echanis% to ensure an ongoing re!iew o" syste%s+ policies and procedures "or risk %anage%ent and procedure to adopt changes( Managing Credit Ris$ Credit risk arises "ro% the potential that an o$ligor is either unwilling to per"or% on an o$ligation or its a$ility to per"or% such o$ligation is i%paired resulting in econo%ic loss to the $ank( ,n a $ankEs port"olio+ losses ste% "ro% outrig)t de%ault due to ina$ility or unwillingness o" a custo%er or counter party to %eet co%%it%ents in relation to lending+ trading+ settle%ent and other "inancial transactions( 4lternati!ely losses %ay result "ro% reduction in port"olio !alue due to actual or percei!ed deterioration in credit *uality( Credit risk e%anates "ro% a $ankEs dealing with indi!iduals+ corporate+ "inancial institutions or a so!ereign( /or %ost $anks+ loans are the largest and %ost o$!ious source o" credit riskJ howe!er+ credit risk could ste% "ro% acti!ities $oth on and o"" $alance sheet( ,n addition to direct accounting loss+ credit risk should $e !iewed in the conte9t o" econo%ic e9posures( #his enco%passes opportunity costs+ transaction costs and e9penses associated with a non-per"or%ing asset o!er and a$o!e the accounting loss( Credit risk can $e "urther su$-categori2ed on the $asis o" reasons o" de"ault( /or instance the de"ault could $e due to country in which there is e9posure or pro$le%s in settle%ent o" a transaction( Credit risk not necessarily occurs in isolation( #he sa%e source that endangers credit risk "or the institution %ay also e9pose it to other risk( /or instance a $ad port"olio %ay attract li*uidity pro$le%( Com(onents o% credit ris$ management 4 typical Credit risk %anage%ent "ra%ework in a "inancial institution %ay $e $roadly categori2ed into "ollowing %ain co%ponents( aC &oard and senior Management3s Oversig)t bC OrganiHational structure cC S#stems and (rocedures %or identi%ication, acce(tance, measurement, monitoring and control ris$sC Credit Ris$ Monitoring E Control Credit risk %onitoring re"ers to incessant %onitoring o" indi!idual credits inclusi!e o" =""-Balance sheet e9posures to o$ligors as well as o!erall credit port"olio o" the $ank( Banks need to enunciate a syste% that ena$les the% to %onitor *uality o" the credit port"olio on day-to-day $asis and take re%edial %easures as and when any deterioration occurs( :uch a syste% would ena$le a $ank to ascertain whether loans are $eing ser!iced as per "acility ter%s+ the ade*uacy o" pro!isions+ the o!erall risk pro"ile is within li%its esta$lished $y %anage%ent and 258 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU co%pliance o" regulatory li%its( )sta$lishing an e""icient and e""ecti!e credit %onitoring syste% would help senior %anage%ent to %onitor the o!erall *uality o" the total credit port"olio and its trends( Conse*uently the %anage%ent could "ine tune or reassess its credit strategy .policy accordingly $e"ore encountering any %aDor set$ack( #he $anks credit policy should e9plicitly pro!ide procedural guideline relating to credit risk %onitoring( 4t %ini%u% it should lay down procedure relating to a( #he roles and responsi$ilities o" indi!iduals responsi$le "or credit risk %onitoring $( #he assess%ent procedures and analysis techni*ues 3"or indi!idual loans 0 o!erall port"olio8 c( #he "re*uency o" %onitoring 4t %ini%u% it should lay down procedure relating to& d( #he periodic e9a%ination o" collaterals and loan co!enants e( #he "re*uency o" site !isits "( #he identi"ication o" any deterioration in any loan Some $e# indicators t)at de(ict t)e credit :ualit# o% a loan: aC "inancial /osition and &usiness ConditionsC #he %ost i%portant aspect a$out an o$ligor is its "inancial health+ as it would deter%ine its repay%ent capacity( Conse*uently institutions need care"ully watch "inancial standing o" o$ligor( <hile %aking such analysis due consideration should $e gi!en to $usiness.industry risk+ $orrowers position within the industry and e9ternal "actors such as econo%ic condition+ go!ern%ent policies+ regulations( /or co%panies whose "inancial position is dependent on key %anage%ent personnel and.or shareholders+ "or e9a%ple+ in s%all and %ediu% enterprises+ institutions would need to pay particular attention to the assess%ent o" the capa$ility and capacity o" the %anage%ent.shareholder3s8( bC Conduct o% AccountsC ,n case o" e9isting o$ligor the operation in the account would gi!e a "air idea a$out the *uality o" credit "acility( ,nstitutions should %onitor the o$ligorEs account acti!ity+ repay%ent history and instances o" e9cesses o!er credit li%its( /or trade "inancing+ institutions should %onitor cases o" repeat e9tensions o" due dates "or trust receipts and $ills( cC 4oan CovenantsC #he o$ligorEs a$ility to adhere to negati!e pledges and "inancial co!enants stated in the loan agree%ent should $e assessed+ and any $reach detected should $e addressed pro%ptly( dC Collateral valuationC :ince the !alue o" collateral could deteriorate resulting in unsecured lending+ $anks need to reassess !alue o" collaterals on periodic $asis( #he "re*uency o" such !aluation is !ery su$Decti!e and depends upon nature o" collaterals( /or instance loan granted against shares need re!aluation on al%ost daily $asis whereas i" there is %ortgage o" a residential property the re!aluation %ay not $e necessary as "re*uently( ,n case o" credit "acilities secured against in!entory or goods at the o$ligorEs pre%ises+ appropriate inspection should $e conducted to !eri"y the e9istence and !aluation o" the collateral( 4nd i" such >oods are perisha$le or such that their !alue di%inish rapidly 3e(g( electronic parts.e*uip%ents8+ additional precautionary %easures should $e taken( Ris$ revie' #he institutions %ust esta$lish a %echanis% o" independent+ ongoing assess%ent o" credit risk %anage%ent process( 4ll "acilities e9cept those %anaged on a port"olio $asis should $e su$Dected to indi!idual risk re!iew at least once in a year( #he results o" such re!iew should $e properly docu%ented and reported directly to $oard+ or its su$ co%%ittee or senior %anage%ent without lending authority( #he purpose o" such re!iews is to assess the credit ad%inistration process+ the accuracy o" credit rating and o!erall *uality o" loan port"olio independent o" relationship with the o$ligor( Copyright Virtual ni!ersity o" Pakistan 259
Banking Laws and Practices-BNK 601 VU ,nstitutions should conduct credit re!iew with updated in"or%ation on the o$ligorEs "inancial and $usiness conditions+ as well as conduct o" account( )9ceptions noted in the credit %onitoring process should also $e e!aluated "or i%pact on the o$ligorEs creditworthiness( Credit re!iew should also $e conducted on a consolidated group $asis to "actor in the $usiness connections a%ong entities in a $orrowing group 4s stated earlier+ credit re!iew should $e per"or%ed on an annual $asisJ howe!er %ore "re*uent re!iew should $e conducted "or new accounts where institutions %ay not $e "a%iliar with the o$ligor+ and "or classi"ied or ad!erse rated accounts that ha!e higher pro$a$ility o" de"ault( /or consu%er loans+ institutions %ay dispense with the need to per"or% credit re!iew "or certain products( 1owe!er+ they should %onitor and report credit e9ceptions and deterioration( Managing Mar$et Ris$ ,t is the risk that the !alue o" on and o""-$alance sheet positions o" a "inancial institution will $e ad!ersely a""ected $y %o!e%ents in %arket rates or prices such as interest rates+ "oreign e9change rates+ e*uity prices+ credit spreads and.or co%%odity prices resulting in a loss to earnings and capital( /inancial institutions %ay $e e9posed to -arket ;isk in !ariety o" ways( -arket risk e9posure %ay $e e9plicit in port"olios o" securities . e*uities and instru%ents that are acti!ely traded( Con!ersely it %ay $e i%plicit such as interest rate risk due to %is%atch o" loans and deposits( Besides+ %arket risk %ay also arise "ro% acti!ities categori2ed as o""-$alance sheet ite%( #here"ore %arket risk is potential "or loss resulting "ro% ad!erse %o!e%ent in %arket risk "actors such as interest rates+ "ore9 rates+ and e*uity and co%%odity prices( #he risk arising "ro% these "actors ha!e $een discussed on "ollowing pages( ?nterest rate ris$: ,nterest rate risk arises when there is a %is%atch $etween positions+ which are su$Dect to interest rate adDust%ent within a speci"ied period( #he $ankEs lending+ "unding and in!est%ent acti!ities gi!e rise to interest rate risk( #he i%%ediate i%pact o" !ariation in interest rate is on $ankEs net interest inco%e+ while a long ter% i%pact is on $ankEs net worth since the econo%ic !alue o" $ankEs assets+ lia$ilities and o""-$alance sheet e9posures are a""ected( 4i:uidit# Ris$: Li*uidity risk is the potential "or loss to an institution arising "ro% either its ina$ility to %eet its o$ligations or to "und increases in assets as they "all due without incurring unaccepta$le cost or losses( Li*uidity risk is considered a %aDor risk "or $anks( ,t arises when the cushion pro!ided $y the li*uid assets are not su""icient enough to %eet its o$ligation( ,n such a situation $anks o"ten %eet their li*uidity re*uire%ents "ro% %arket( 1owe!er conditions o" "unding through %arket depend upon li*uidity in the %arket and $orrowing institutionEs li*uidity( 4ccordingly an institution short o" li*uidity %ay ha!e to undertake transaction at hea!y cost resulting in a loss o" earning or in worst case scenario the li*uidity risk could result in $ankruptcy o" the institution i" it is una$le to undertake transaction e!en at current %arket prices( Banks with large o""-$alance sheet e9posures or the $anks+ which rely hea!ily on large corporate deposit+ ha!e relati!ely high le!el o" li*uidity risk( /urther the $anks e9periencing a rapid growth in assets should ha!e %aDor concern "or li*uidity( Li*uidity risk %ay not $e seen in isolation+ $ecause "inancial risk are not %utually e9clusi!e and li*uidity risk o"ten triggered $y conse*uence o" these other "inancial risks such as credit risk+ %arket risk etc( /or instance+ a $ank increasing its credit risk through asset concentration etc %ay $e increasing its li*uidity risk as well( :i%ilarly a large loan de"ault or changes in interest rate can ad!ersely i%pact a $ankEs li*uidity position( /urther i" %anage%ent %isDudges the i%pact on li*uidity o" entering into a new $usiness or product line+ the $ankEs strategic risk would increase( Managing O(erational Ris$ =perational risk is the risk o" loss resulting "ro% inade*uate or "ailed internal processes+ people and syste% or "ro% e9ternal e!ents( 260 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU =perational risk is associated with hu%an error+ syste% "ailures and inade*uate procedures and controls( ,t is the risk o" loss arising "ro% the potential that inade*uate in"or%ation syste%J technology "ailures+ $reaches in internal controls+ "raud+ un"oreseen catastrophes+ or other operational pro$le%s %ay result in une9pected losses or reputation pro$le%s( =perational risk e9ists in all products and $usiness acti!ities( =perational risk e!ent types that ha!e the potential to result in su$stantial losses includes ,nternal "raud+ )9ternal "raud+ e%ploy%ent practices and workplace sa"ety+ clients+ products and $usiness practices+ $usiness disruption and syste% "ailures+ da%age to physical assets+ and "inally e9ecution+ deli!ery and process %anage%ent( #he o$Decti!e o" operational risk %anage%ent is the sa%e as "or credit+ %arket and li*uidity risks that is to "ind out the e9tent o" the "inancial institutionEs operational risk e9posureJ to understand what dri!es it+ to allocate capital against it and identi"y trends internally and e9ternally that would help predicting it( #he %anage%ent o" speci"ic operational risks is not a new practiceJ it has always $een i%portant "or $anks to try to pre!ent "raud+ %aintain the integrity o" internal controls+ and reduce errors in transactions processing+ and so on( 1owe!er+ what is relati!ely new is the !iew o" operational risk %anage%ent as a co%prehensi!e practice co%para$le to the %anage%ent o" credit and %arket risks in principles( /ailure to understand and %anage operational risk+ which is present in !irtually all $anking transactions and acti!ities+ %ay greatly increase the likelihood that so%e risks will go unrecogni2ed and uncontrolled( #he a$o!e guidelines pro!ide a working docu%ent to sa"eguard the interests o" the $ank and other stake holders(
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VU LESSON 44
TAE "?NANC?A4 ?NST?TUT?ONS ;RECOVER= O" "?NANCES< OR7?NANCE, !88 ,n case loan workout e""ort through negotiation+ restructuring+ rescheduling+ and other %ethods are not worka$le then option o" "iling a reco!ery suit %ay $e e9ercised $y $anks. "inancial institutions as a last resort( #he law go!erning reco!ery o" "inances is go!erned $y the "inancial institutions 3reco!ery o" "inance8 =rdinance+ @001+ i%portant aspects o" this ordinance are co!ered in the "ollowing paragraphs( Contents 'e"initions& :ec @ 'uty o" a custo%er& :ec ? )sta$lish%ent o" Banking Court under :ec B Powers o" Banking Courts outlined in sec 6 :uit "or reco!ery o" written o"" "inances& :ec C Procedure o" Banking Courts& :ec 5 Lea!e to de"end uni*ue concept& :ec 10 :ale o" %ortgaged property& :ec 1B 4ttach%ent $e"ore Dudg%ent+ inDunction and appoint%ent o" ;ecei!ers& :ec 16 Pro!isions relating to certain o""ences& :ec @0 4pplication o" "ines and costs& :ec @1 4ppeal& :ec @@ ;estriction on trans"er o" assets 0 properties& :ec @? ,nde%nity& :ec @C 7e%initions: b< M&an$ing CourtJ %eans& 3i8 ,n respect o" a case in which the claim does not eBceed %i%t# million ru(ees or "or the trial o" o%%ences under this =rdinance+ the Court esta$lished under section BJ and 3ii8 ,n respect o" any other case+ t)e Aig) CourtC ;c< JcustomerM %eans a person to who% "inance has $een e9tended $y a "inancial institution and includes a person on whose $ehal" a guarantee or letter o" credit has $een issued $y a "inancial institution as well as a surety or an inde%ni"ierJ 7ut# o% a customer: Sec * ; < ,t shall $e the duty o" a custo%er to "ul"ill his o$ligations to the "inancial institution( ;!< <here the custo%er de"aults in the discharge o" his o$ligation+ he shall $e lia$le to pay+ "or the period "ro% the date o" his de"ault till reali2ation o" the cost o" "unds o" the "inancial institution as certi"ied $y the :tate Bank o" Pakistan "ro% ti%e to ti%e+ apart "ro% such other ci!il and cri%inal lia$ilities that he %ay incur under the contract or rules or any other law "or the ti%e $eing in "orce( ;*< /or purposes o" this section a Dudg%ent against a custo%er under this =rdinance shall %ean that he is in de"ault o" his duty under su$-section 318+ and the ensuing decree shall pro!ide "or pay%ent o" the cost o" "unds as deter%ined under su$-section 3@8( Establis)ment o% &an$ing Court: Sec 0 ; < #he /ederal >o!ern%ent %ay+ $y noti"ication in the =""icial >a2ette+ esta$lish as %any Banking Courts as it considers necessary to e9ercise Durisdiction under this =rdinance and appoint a Audge "or each o" such Courts and where it esta$lishes %ore Banking Courts than one+ it shall speci"y in the noti"ication the territorial li%its within which each o" the Banking Courts shall e9ercise its Durisdiction( ;!< <here %ore Banking Courts than one ha!e $een esta$lished to e9ercise Durisdiction in the sa%e territorial li%its+ the /ederal >o!ern%ent shall de"ine the territorial li%its o" each such Court( ;*< <here %ore Banking Courts than one ha!e $een esta$lished in the sa%e or di""erent territorial li%its+ the 1igh Court %ay+ i" it considers it e9pedient to do so in the interest o" Dustice or "or the con!enience o" the parties or o" the witnesses+ trans"er any case "ro% one Banking Court to another( 262 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU ;1< A @udge o" a Banking Court shall $e appointed $y the /ederal >o!ern%ent a"ter consultation with the Chie" Austice o" the 1igh Court o" the Pro!ince in which the Banking Court is esta$lished and no person shall $e appointed a Audge o" a Banking Court unless he has $een a Audge o" a 1igh Court or is or has $een a 'istrict Audge( ;0< 4 Banking Court shall hold its sitting at such places within its territorial Durisdiction as %ay $e deter%ined $y the /ederal >o!ern%ent( ;.< 4 Audge o" Banking Court+ not $eing a 'istrict Audge+ shall $e appointed "or a ter% o" three years "ro% the date on which he enters upon his o""ice( ;5< #he salary+ allowances and other ter%s and conditions o" ser!ice o" a person appointed as a Audge o" Banking Court shall $e such as the /ederal >o!ern%ent %ay deter%ine( ;6< #he Banking Court %ay+ i" it so re*uires+ $e assisted in technical aspects o" $anking transactions in!ol!ed in any case $y an amicus curiae who has at least ten years e9perience o" $anking at a senior %anage%ent le!el in a "inancial institution o" repute or the :tate Bank o" Pakistan and has the "ollowing *uali"ications+ na%ely&iC 4 degree in Co%%erce and 4ccounts or in )cono%icsJ or iiC 4 degree in Business 4d%inistrationJ or iiiC 1as co%pleted a course in $anking "ro% the ,nstitute o" Bankers+ Pakistan( ;e%uneration o" the a%icus curiae+ and the party or parties $y who% it will $e paya$le+ will $e deter%ined $y the Banking Court+ keeping in !iew the circu%stances o" each case( Suit %or recover# o% 'ritten o%% %inances: Sec 6 318 :u$Dect to su$-section 3@8+ and notwithstanding anything contained in the Li%itation 4ct+ 150C 3,S o" 150C8 or any other law+ a %inancial institution %ay+ within three years "ro% the date o" co%ing into "orce o" this =rdinance+ "ile a suit "or the reco!ery o" any a%ount written o""+ released or adDusted under any agree%ent+ contract+ or consent+ including a co%pro%ise or withdrawal o" any suit or legal proceedings or adDust%ent o" a decree $etween a "inancial institution and a custo%er on any day on or a"ter the "irst day o" Aanuary+ 1550 and $e"ore the co%ing into "orce o" this =rdinance , i% it can establis) that the a%ount was written o""+ released or adDusted %or (olitical reasons or considerations other than $ona "ide $usiness considerations( ;@8 No suit under su$ section 318 shall $e "iled unless its "iling has $een appro!ed $y& 8a9 #he Board o" 'irectors+ in the case o" a "inancial institution incorporated within Pakistan+ 8b9 =r the chie" e9ecuti!e 3$y whate!er na%e called or designated8 o" the "inancial institution in Pakistan+ in the case o" a "inancial institution incorporated outside Pakistan( 4eave to de%end: Sec 8 a( ,n any case in which the su%%ons has $een ser!ed on the de"endant as pro!ided "or in su$-section 3B8 o" section 5+ the de"endant shall not $e entitled to de"end the suit unless he o$tains lea!e "ro% the Banking Court as hereina"ter pro!ided to de"end the sa%e and+ in de"ault o" his doing so+ the allegations o" "act in the plaint shall $e dee%ed to $e ad%itted and the Banking Court %ay pass a decree in "a!our o" the plainti"" on the $asis thereo" or such other %aterial as the Banking Court %ay re*uire in the interests o" Dustice( $( #he de"endant shall "ile the application "or lea!e to de"end within thirty days o" the date o" "irst ser!ice $y any one o" the %odes laid down in su$-section 3B8 o" section 5&;!< Pro!ided that where ser!ice has $een !alidly a""ected only through pu$lication in the newspapers+ the Banking Court %ay e9tend the ti%e "or "iling an application "or lea!e to de"end i" satis"ied that the de"endant did not ha!e knowledge thereo"( ;*< #he application "or lea!e to de"end shall $e in the %orm o% a 'ritten statement + and shall contain a su%%ary o" the su$stantial *uestions o" law as well as "act in respect o" which+ in the opinion o" the de"endant+ e!idence needs to $e recorded( ( ;1< ,n the case o" a suit "or reco!ery instituted $y a "inancial institution the application "or lea!e to de"end shall also speci"ically state the "ollowing & Copyright Virtual ni!ersity o" Pakistan 263
Banking Laws and Practices-BNK 601 VU ;a<C #he a%ount o" "inance a!ailed $y the de"endant "ro% the "inancial institutionJ the a%ounts paid $y the de"endant to the "inancial institution and the dates o" pay%entsJ ;b<C #he a%ount o" "inance and other a%ounts relating to the "inance paya$le $y the de"endant to the "inancial institution up to the date o" institution o" the suitJ ;c<C #he a%ount i" any which the de"endant disputes as paya$le to the "inancial institution and "acts in support thereo"& #he application "or lea!e to de"end shall $e acco%panied $y all the rele!ant docu%ents( ;0< 4n application "or lea!e to de"end which does not co%ply with the re*uire%ents o" su$-sections 3?8+ 378 where applica$le and 3B8 shall $e reDected+ unless the de"endant discloses therein su""icient cause "or his ina$ility to co%ply with any such re*uire%ent( Questions o" law or "act raised $y hi%( ;.< #he plainti"" shall $e gi!en an opportunity o" "iling a reply to the application "or lea!e to de"end+ in the "or% o" a replication( ;5< :u$Dect to section 11+ the Banking Court shall grant the de"endant lea!e to de"end the suit i" on consideration o" the contents o" the plaint+ the application "or lea!e to de"end and the reply thereto it is o" the !iew that su$stantial *uestions o" law or "act ha!e $een raised in respect o" which e!idence needs to $e recorded( ;6< ,n granting lea!e under su$-section 3C8+ the Banking Court %ay i%pose such conditions as it %ay dee% appropriate in the circu%stances o" the case+ including conditions as to deposit o" cash or "urnishing o" security( ;-< <here the application "or lea!e to de"end is accepted+ the Banking Court shall treat the application as a written state%ent+ and in its order granting lea!e shall "ra%e issues relating to the su$stantial *uestions o" law or "act+ and+ su$Dect to "ul"ill%ent o" any conditions attached to grant o" lea!e+ "i9 a date "or recording o" e!idence thereon and disposal o" the suit( ; 8< <here the application "or lea!e to de"end is reDected or where a de"endant "ails to "ul"ill the conditions attached to the grant o" lea!e to de"end+ the Banking Court shall "orthwith proceed to pass Dudg%ent and decree in "a!or o" the plainti"" against the de"endant( ; <<here an application "or lea!e to de"end has $een "iled $e"ore the co%ing into "orce o" this =rdinance+ the de"endant shall $e allowed a period o" twenty-one days "ro% the date o" co%ing into "orce o" this =rdinance+ or "ro% the date o" "irst hearing therea"ter+ whiche!er is later+ "or "iling an a%ended application "or lea!e to de"end in accordance with the pro!isions o" this =rdinance( 7is(osal o% suit: Sec * ; < 4 suit in which lea!e to de"end has $een granted to the de"endant shall $e disposed o" within ninety days "ro% the day on which lea!e was granted+ and in case proceedings continue $eyond the said period the de"endant %ay $e re*uired to "urnish security in such a%ount as the Banking Court dee%s "it+ and on the "ailure o" the de"endant to "urnish such security+ the Banking Court shall pass an interi% or "inal decree in such a%ount as it %ay dee% appropriate( ;!< #he re*uire%ent o" "urnishing security under su$-section 318 shall $e dispensed with i"+ in the opinion o" the Banking Court+ the delay is not attri$uta$le to the conduct o" the de"endant( ;*< :uits $e"ore a Banking Court shall co%e up "or regular hearing as e9peditiously as possi$le and e9cept in e9traordinary circu%stances and "or reasons to $e recorded+ a Banking Court shall not allow adDourn%ents "or %ore than se!en days( ;1< <here lea!e to de"end is granted and e!idence is to $e recorded+ the parties %ay "ile a""ida!its in respect o" the e9a%ination-in-chie" o" any witness who is not to $e su%%oned through the Banking Court+ and where such a""ida!its are "iled+ the Banking Court shall gi!e notice thereo" to the other contesting parties and on the date "i9ed "or recording e!idence+ shall+ su$Dect to such %odi"ication as %ay $e re*uired "or purposes o" production and e9hi$iting o" docu%ents+ or otherwise in accordance with law+ treat the a""ida!it as e9a%ination-in-chie" and allow the contesting parties an opportunity "or cross-e9a%ination on the $asis thereo"( "inal 7ecree: Sec 5 ; < #he "inal decree passed $y a Banking Court shall pro!ide "or pay%ent "ro% the date o" de"ault o" the a%ounts "ound to $e paya$le on account o" the de"ault in "ul"ill%ent o" the o$ligation+ and "or 264 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU costs including+ in the case o" a suit "iled $y a "inancial institution cost o" "unds deter%ined under section ?( ;!< #he Banking Court %ay+ at the ti%e o" passing a "inal decree+ also pass an order o" the nature conte%plated $y su$-section 318 o" section 16 to the e9tent o" the decrial a%ount( /rovisions relating to certain o%%ences: Sec !8 ; < <hoe!er& ;a<C dishonestly co%%its a $reach o" the ter%s o" a letter o" hypothecation+ trust receipt or any other instru%ent or docu%ent e9ecuted $y hi% where$y possession o" the assets or properties o""ered as security "or the re-pay%ent o" "inance or "ul"ill%ent o" any o$ligation are not with the "inancial institution $ut are retained $y or entrusted to hi% "or the purposes o" dealing with the sa%e in the ordinary course o" $usiness su$Dect to the ter%s o" the letter o" hypothecation or trust receipt or other instru%ent or docu%ent or "or the purpose o" e""ecting their sale and depositing the sale proceeds with the "inancial institutionJ or ;b<C %akes "raudulent %is-representation or co%%its a $reach o" an o$ligation or representation %ade to a "inancial institution on the $asis o" which the "inancial institution has granted a "inanceJ or ;c<C su$se*uent to the creation o" a %ortgage in "a!or o" a "inancial institution+ dishonestly alienates or parts with the possession o" the %ortgaged property whether $y creation o" a lease or otherwise contrary to the ter%s thereo"+ without the written per%ission o" the "inancial institutionJ or ;d<C su$se*uent to the passing o" a decree under section 10 or 11+ sells+ trans"ers or otherwise alienates+ or parts with possession o" his assets or properties ac*uired a"ter the grant o" "inance $y the "inancial institution+ including assets or properties ac*uired $ena%i in the na%e o" an ostensi$le owner shall+ without preDudice to any other action which %ay $e taken against hi% under this =rdinance or any other law "or the ti%e $eing in "orce+ $e punisha$le with i%prison%ent o" either description "or a ter% which %ay e9tend to three years and shall also $e lia$le to a "ine which %ay e9tend to the !alue o" the property or security as decreed or the %arket !alue whiche!er is higher and shall $e ordered $y the Banking Court trying the o""ence to deli!er up or re"und to the "inancial institution+ within a ti%e to $e "i9ed $y the Banking Court+ the property or the !alue o" the property or security( EB(lanation: ; < 'ishonesty %ay $e presu%ed where a custo%er has not deposited the sale proceeds o" the property with the "inancial institution in !iolation o" the ter%s o" the agree%ent $etween the "inancial institution and the custo%er( ;!< <hoe!er knowingly %akes a state%ent which is "alse in %aterial respects in an application "or "inance and o$tains a "inance on the $asis thereo"+ or applies the a%ount o" the "inance towards a purpose other than that "or which the "inance was o$tained $y hi%+ or "urnishes a "alse state%ent o" stocks in !iolation o" the ter%s o" the agree%ent with the "inancial institution or "alsely denies his signatures on any $anking docu%ent $e"ore the Banking Court+ shall $e guilty o" an o""ence punisha$le with i%prison%ent o" either description "or a ter% which %ay e9tend to three years+ or with "ine+ or with $oth( ;*< <hoe!er resists or o$structs+ either $y hi%sel" or on $ehal" o" the Dudg%ent de$tor+ through the use o" "orce+ the e9ecution o" a decree+ shall $e punisha$le with i%prison%ent+ which %ay e9tend to one year+ or with "ine+ or with $oth( ;1< <hoe!er dishonestly issues a che*ue towards re-pay%ent o" a "inance or "ul"ill%ent o" an o$ligation which is dishonored on presentation+ shall $e punisha$le with i%prison%ent which %ay e9tend to one year+ or with "ine or with $oth+ unless he can esta$lish+ "or which the $urden o" proo" shall rest on hi%+ that he had %ade arrange%ents with his $ank to ensure that the che*ue would $e honored and that the $ank was at "ault in not honoring the che*ue(
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Banking Laws and Practices-BNK 601 VU ;0< <here the person guilty o" an o""ence under this =rdinance is a co%pany or other $ody corporate+ the chie" e9ecuti!e $y whate!er na%e called+ and any director or o""icer in!ol!ed shall $e dee%ed to $e guilty o" the o""ence and shall $e lia$le to $e prosecuted against and punished accordingly( ;.< 4ll o""ences under this =rdinance shall $e $aila$le+ non-cogni2a$le and co%pounda$le( A((lication o% %ines and costs: Sec ! ; < 4 Banking Court %ay direct that the whole or part o" any "ine or costs i%posed under this =rdinance shall $e applied in or towards& a< Pay%ent o" costs o" all or any proceedings under this =rdinanceJ and b< Pay%ent o" co%pensation to an aggrie!ed party( ;!< 4n order under su$-section 318 shall $e dee%ed to $e a decree passed under this =rdinance "or purposes o" e9ecution( A((eal: Sec !! ; < :u$Dect to su$-section 3@8+ any person aggrie!ed $y any Dudg%ent+ decree+ sentence+ or "inal order passed $y a Banking Court %ay+ within thirty days o" such Dudg%ent+ decree+ sentence or "inal order pre"er an appeal to the 1igh Court( ;!< #he appellant shall gi!e notice o" the "iling o" the appeal in accordance with the pro!isions o" =rder SL,,, ;ule ? o" the Code o" Ci!il Procedure 34ct V o" 150C8 to the respondent who %ay appear $e"ore the Banking Court to contest ad%ission o" the appeal on the date "i9ed "or hearing( ;*< #he 1igh Court shall at the stage o" ad%ission o" the appeal+ or at any ti%e therea"ter either suo %oto or on the application o" the decree holder+ decide $y %eans o" a reasoned order whether the appeal is to $e ad%itted in part or in whole depending on the "acts and circu%stances o" the case+ and as to the security to $e "urnished $y the appellant& ;1< 4n appeal under su$-section 318 shall $e heard $y a $ench o" not less than two Audges o" the 1igh Court and+ in case the appeal is ad%itted+ it shall $e decided within 50 days "ro% the date o" ad%ission( ;0< 4n appeal %ay $e pre"erred under this section "ro% a decree passed e9-parte( ;.< No appeal+ re!iew or re!ision shall lie against an order accepting or reDecting an application "or lea!e to de"end+ or any interlocutory order o" the Banking Court which does not dispose o" the entire case $e"ore the Banking Court other than an order passed under su$-section 3118 o" section 1B or su$-section 368 o" section 15( ;5< 4ny order o" stay o" e9ecution o" a decree passed under su$-section 3@8 shall auto%atically lapse on the e9piry o" si9 %onths "ro% the date o" the order whereupon the a%ount deposited in Court shall $e paid o!er to the decree-holder or the decree-holder %ay en"orce the security "urnished $y the Dudg%ent-de$tor( #hrough this law+ the $anks and "inancial institutions can approach the $anking courts "or reco!ery o" the "inances. "acilities "ro% the de"aulters(
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Banking Laws and Practices-BNK 601 ANC?44AR= STATUTES
VU LESSON 45
#here are certain statues. law which ha!e $earing on $anking transactions and as such ha!e their i%portance to all stake holders( Keeping in !iew the i%portance o" these statutes we shall discuss the "ollowing statutes in this Lesson& Li%itation 4ct+ 150C :ta%p 4ct+ 1CC5 4r$itration 4ct+ 1570 Contract+ 1C6@ 4imitation Act, -86 Contents: =$Dects+ concept Pro!ision to $e applied without e*uita$le consideration& :ec 1 ;aising o" Plea o" Li%itation& :ec ? ;estriction o" ti%e 3li%itation Period8 Condonation o" delayNwhere su""icient cause e9isted to the satis"action o" court( Legal disa$ility& :ec 6 )9clusion o" ti%e while co%puting ti%e o" li%itation 3 :ec 1@ to 168 /irst schedule contains period o" li%itation in di""erent suits( Objects: ,t go!erns the process o" litigation and li%its the ti%e a"ter which a suit or other proceeding cannot $e %aintained 3en"orced8 in a court o" law( ,t re*uires pro%ptness in the prosecution o" re%edy $ecause law assists those who are !igilant and not those who sleep o!er their rights 3;ights to seek re%edyNProsecution to seek re%edy within period prescri$ed $y li%itation 4ct( :tatute o" li%itation has $een ter%ed as statute o" repose+ peace and Dustice( 'octrine o" li%itation is "or%ed on pu$lic policy and e9pediency( ;e%o!es constant uncertainty+ dou$t and suspense( Condonation o% dela# b# courtC <here Dust and su""icient cause has $een shown to court+ to condone the delay Act )as t'o (arts: /irst part consist o" L:ections :econd part co!er schedules 3/irst 'i!ision8 :chedules 4rticle 1 to 175---suits o" !arious descriptions %entioned( 3:econd 'i!ision8 4rticle 1B0 to 1B6---deals with 4ppeals( 3#hird 'i!ision8 4rticle 1BC to 1C?---deals with certain applications o" !arious types( ,n all these articles is %entioned the re*uisite period o" li%itation within which rele!ant appeal or application can $e %ade( 1owe!er+ pro!isions o" special law to pre!ail o!er general law 3$anking CosE =rdinance+ ,nco%e #a9 =rdinance+ /a%ily Law etc are e9a%ples o" :pecial Laws8( #he inherent power o" the court cannot o!erride the statute o" li%itation( ,t is also not open to parties to alter the prescri$ed period o" li%itation or to contract the%sel!es out o" statute o" li%itation+ can ne!er ha!e the e""ect o" pre!enting the period o" li%itation "ro% running out 3PL' 15C5 Lahore ?508( <hen a plea o" li%itation is raised and is reDected+ it cannot $e re-agitated in appeal $ecause o" the "act that pre!ious "inding has attained "inality 315C6 PLC 10?18(
Conce(t: Copyright Virtual ni!ersity o" Pakistan 267
Banking Laws and Practices-BNK 601 VU :tatute o" li%itation is a procedural statute( ,ts application does not always %ean to usurp or help usurp a right( ,t rather operates on the principle that i" a clai%ant wai!ed his right or was not serious and rather indolent so as to ha!e ac*uiesced+ he will $e hit $y the doctrine o" li%itation #he concept o" law is only that the authority created or appointed "or helping a clai%ant 3$anking court e-g8 in such a situation will not help i" the clai%ant knowing the position o" law does not ask "or it within the prescri$ed period( <e shall discuss i%portant pro!isions contained in this 4ct in the "ollowing paragraphs& Section : Pro!ision to $e applied without e*uita$le consideration 1owe!er+ suspension o" application o" pro!isions o" statute o" li%itation only in cases where court $y its own 4ct or o!ersight causes any inDury or inDustice to a particular party( Li%itation 4ct 3150C8 /rovisions o% limitation Act ; -86< are not a((licable to t)e %ollo'ing: Land 4c*uisition 4ct o" 1C57 Proceeding under /rontier Cri%es ;egulation 3o" 150183/C;8 Section *: Raising /lea o% 4imitation: 4 suit instituted+ appeal pre"erred an application %ade a"ter period o" li%itation prescri$ed there"oreN shall $e dis%issed although li%itation has not $een set up as de"ense( Court to e9a%ine the *uestion o" li%itation e!en i" not raisedNit is the duty o" court to decide *uestion o" li%itation on %eritsJ ignorance to do so is a legal error( Section 0: Restriction o% time ;limitation /eriod< is an outcome o% (ublic (olic#C ;eBce(tions in suitable cases<C Condonation o" delayNto ad!ance cause o" su$stantial DusticeNplausi$le e9planation o" delay !ufficient Cause000is genuine or good cause+ $ecause that is $eyond the control o" the party+ una!oida$le despite care and attention( 4$nor%al conditions o" the country( 'istur$ed state o" a country Audg%ent announced in a$sence o" the party 3Conde%ned unheard8( Person entitled to notice etc(8 4egal disabilit#: Sec . ; < <here a person entitled to institute a suit Tor proceedingU or %ake an application "or the e9ecution o" a decree is+ at the ti%e "ro% which the period o" li%itation is to $e reckoned a %inor+ or insane+ or an idiot+ he %ay institute the suit Tor proceedingU or %ake the application within the sa%e period a"ter the disa$ility has ceased+ as would otherwise ha!e $een allowed "ro% the ti%e prescri$ed( ;!< Li%itation 4ct 3150C8 ;*< <here such person is+ at the ti%e "ro% which the period o" li%itation is to $e reckoned+ a""ected $y two such disa$ilities+ or where+ $e"ore his disa$ility has ceased+ he is a""ected $y another disa$ility+ he %ay institute the suit or %ake the application within the sa%e period+ $oth disa$ilities ha!e ceased+ as would otherwise ha!e $een allowed "ro% the ti%e so prescri$ed( ;1< <here the disa$ility continues up to the death o" such person+ his legal representati!e %ay institute the suit or %ake the application within the sa%e period a"ter the death as would otherwise ha!e $een allowed "ro% the ti%e so prescri$ed( ;0< <here such representati!e is at the date o" the death a""ected $y any such disa$ility+ the rules contained in su$sections 318 and 3@8 shall apply( Suits on %oreign contracts: Sec 268 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU :uits instituted in Pakistan on contracts entered into in a "oreign country are su$Dect to the rules o" li%itation contained in this 4ct( No "oreign rule o" li%itation shall $e a de"ence to a suit instituted in TPakistanU on a contract entered into in a "oreign country+ unless the rule has e9tinguished the contract and the parties were do%iciled in such country during the period prescri$ed $y such rule( EBclusion o% time in legal (roceedings: Sec ! EBclusion o% time o% de%endantFs absence %rom /a$istan etcC and certain ot)er territories: Sec * EBclusion o% time o% (roceeding bona %ide in Court 'it)out jurisdiction: Sec 1 EBclusion o% time during ')ic) (roceedings are sus(ended: Sec 0 EBclusion o% time during ')ic) (roceedings to set aside eBecution sale are (ending: Sec . E%%ect o% deat) be%ore rig)t to sue accrues: Sec 5 <here a person+ who would+ i" he were li!ing+ ha!e a right to institute a suit or %ake an application+ dies $e"ore the right accrues+ the period o" li%itation shall $e co%puted "ro% the ti%e when there is a legal representati!e o" the deceased capa$le o" instituting or %aking such suit or application( <here a person against who%+ i" he were li!ing+ a right to institute a suit or %ake an application would ha!e accrued dies $e"ore the right accrues+ the period o" li%itation shall $e co%puted "ro% the ti%e when there is a legal representati!e o" the decreased against who% the plainti"" %ay institute or %ake such suit or application( Nothing in su$sections 318 and 3@8 applies to suits to en"orce rights o" pre-e%ption or to suits "or the possession o" i%%o!a$le property or o" an hereditary o""ice( Li%itation 4ct 3150C8 E%%ect o% %raud: Sec 6 <here any person ha!ing a right to institute a suit or %ake an application has+ $y %eans o" "raud+ $een kept "ro% the knowledge o" such right or o" the title on which it is "ounded( or where any docu%ent necessary to esta$lish such right has $een "raudulently concealed "ro% hi%( #he ti%e li%ited "or instituting a suit or %aking an application-- 4gainst the person guilty o" the "raud or accessory thereto+ or 4gainst any person clai%ing through hi% otherwise than in good "aith and "or a !alua$le consideration+ shall $e co%puted "ro% the ti%e when the "raud "irst $eca%e known to the person inDuriously a""ected there$y+ or+ in the case o" the concealed docu%ent+ when he "irst had the %eans o" producing it or co%pelling its production E%%ect o% ac$no'ledgment in 'riting: Sec <here+ $e"ore the e9piration o" the period prescri$ed "or a suit or application in respect o" any property or right+ an acknowledg%ent o" lia$ility in respect o" such property or right has $een %ade in writing signed $y the party against who% such property or right is clai%ed+ or $y so%e person through who% he deri!es title or lia$ility+ a "resh period o" li%itation shall $e co%puted "ro% the ti%e when the acknowledg%ent was so signed( <here the writing containing the acknowledg%ent is undatedJ oral e!idence %ay $e gi!en o" the ti%e when it was signedJ $ut+ su$Dect to the pro!isions o" the )!idence 4ct+ 1C6@+ oral e!idence o" its contents shall not $e recei!ed E%%ect o% (a#ment on account o% debt or o% interest on legac#: Sec !8 <here pay%ent on account o" a de$t or o" interest on a legacy is %ade $e"ore the e9piration o" the prescri$ed period $y the person lia$le to pay the de$t or legacy+ or $y his duly authorised agent+ a "resh period o" li%itation shall $e co%puted "ro% the ti%e when the pay%ent was %ade& ;!< )""ect o" receipt o" produce o" %ortgaged land(---<here %ortgaged land is in the possession o" the %ortgagee+ the receipt o" the rent or produce o" such land shall $e dee%ed to $e a pay%ent "or the purpose o" su$section 318( #he "irst schedule to li%itation 4ct 1C05 is appended $elow& Copyright Virtual ni!ersity o" Pakistan 269
Banking Laws and Practices-BNK 601 VU TAE "?RST SCAE7U4E ;See section *< "?RST 7?V?S?ON: SU?TS Period o" li%itation#i%e "ro% which 'escription o" suit Part ,(---#hirty days period $egins to run 1( #o contest an award o" the Board or #hirty days <hen notice o" the award is ;e!enue under the <aste Lands 3Clai%s8Part ,,(---Ninety days deli!ered to the plainti""( 4ct+ 1C6?( @( /or co%pensation or doing or "or o%ittingNinety days <hen the act or o%ission takes to do an act alleged to $e in pursuance o" Part ,,,(---:i9 %onths place any enact%ent in "orce "or the ti%e $eing in TPakistanU( :i9 %onths ?( nder the :peci"ic ;elie" act + 1C66+ <hen the dispossession occurs( section 5 to reco!er possession o" Part ,V ---=ne Iear i%%o!a$le property( B( nder the su%%ary procedure re"erred to <hen the de$t or li*uidated in section 1@C3@83"8 o" the Code o" Ci!il de%and $eco%es paya$le or Procedure+ 150C Twhere the pro!ision o"T=ne yearU when the property $eco%es such su%%ary procedure does not e9clude reco!era$le( the ordinary procedure in such suits 6( pon a :tatute+ 4ct <hen the penalty or "or"eiture is ;egulation or Bye-law+ o" a penalty or =ne year incurred( "or"eiture( 6( /or the wages o" a household ser!ant+ <hen the wages accrue due artisan T=ne yearU( or la$orer C( /or the price o" "ood <hen the "ood or drink is or drink sold $y the keeper o" a hotel+ ta!ern T=ne yearU( deli!ered( or lodging house( <hen the price $eco%es 5( /or the price o" lodging( T=ne yearU paya$le( <hen the purchaser takes+ under the sale sought to $e i%peached+ physical possession o" the 10( #o en"orce a right o" pre-e%ption whole o" the property sold+ or+ whether the right is "ounded on law+ orT=ne yearU where the su$Dect o" the sale general usage+ or on special contract( does not ad%it o" physical possession+ when the instru%ent o" sale is registered( 11( By a person against who% any o" the #he date o" the order( "ollowing orders has $een %ade to esta$lish the right which he clai%s to the property co%prised in the order& T=ne yearU(( 318 =rder under the Code o" Ci!il Procedure+ 150C+ on a clai% pre"erred to+ or an o$Dection %ade to the attach%ent o"+ property attached in e9ecution o" a decreeJ 11-4( By a person against who% an order T=ne yearU(( #he date o" the order( has $een %ade under the Code o" Ci!il Procedure+ 150C+ upon an application $y the holder or a decree "or the possession o" i%%o!a$le property or $y the purchaser o" such property sold in e9ecution o" a decree+ 270 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 co%plaining o" resistance or o$struction to the deli!ery o" possession thereo"+ or upon an application $y any person dispossessed o" such property in the deli!ery o" possession thereo" to the decree-holder or purchaser+ to esta$lish the right which he clai%s to the present possession o" the property co%prised in the order( 1@( #o set aside any o" the "ollowing sales&-- T=ne yearU 3a8 :ales in e9ecution o" a decree o" a Ci!il CourtJ 3$8 sale in pursuance o" a decree or order o" a Collector or other o""icer o" re!enue 3c8 sale "or arrears o" >o!ern%ent re!enue+ or "or any de%and reco!era$le as such arrearsJ 3d8 sale o" a patni talu* sold "or current arrears o" rent( )9planation( ---,n this article MpatniM includes any inter%ediate tenure salea$le "or current arrears o" rent( 1?( #o alter or set aside a decision or order o" a Ci!il Court in any proceeding other thanT=ne yearU a suit( 17( #o set aside any act T=ne yearU( or order o" an o""icer o" >o!ern%ent in his o""icial capacity+ not herein otherwise e9pressly pro!ided "or( 1B( 4gainst >o!ern%ent to set aside anyT=ne yearU attach%ent+ lease or trans"er o" i%%o!a$le property $y the ;e!enue 4uthorities "or arrears o" >o!ern%ent re!enue( 16( 4gainst >o!ern%ent to reco!er %oney T=ne yearU paid under protest in satis"action o" a clai% %ade $y the re!enue authorities on account o" arrears o" re!enue or on account o" de%ands reco!era$le as such arrears( 16( 4gainst >o!ern%ent "or T=ne yearU co%pensation "or land ac*uired "or pu$lic purposes( 1C( Like suit "or co%pensation 3when the T=ne yearU ac*uisition is not co%pleted8( 15( /or co%pensation "or "alseT=ne yearU i%prison%ent( @0( By e9ecutors+ ad%inistrators orT=ne yearU representati!es under the Legal ;epresentati!es :uits 4ct + 1CBB( @1( By e9ecutors+ T=ne yearU ad%inistrators or representati!es under the
VU
<hen the sale is con"ir%ed+ or would otherwise ha!e $eco%ingly and conclusi!e had no such suit $een $rought(
#he date o" the "inal decision or order in the case $y a Court co%petent to deter%ine i" "inally #he date o" the act or order(
<hen the pay%ent is %ade((
<hen the pay%ent is %ade(
#he date o" deter%ining the a%ount o" the co%pensation( #he date o" the re"usal to co%plete( <hen the i%prison%ent ends( #he date o" the death o" the person wronged( #he date o" the death o" the person killed( 271
Banking Laws and Practices-BNK 601 /atal 4ccidents act + 1CBB( @@( /or co%pensation "or any other inDury toT=ne yearU the person( @?( /or co%pensation "or %aliciousT=ne yearU prosecution
VU <hen the inDury is co%%itted( <hen the plainti"" is a ac*uitted+ or the prosecution is otherwise ter%inated( <hen the li$el is pu$lished( <hen the words are spoken spoken or+ i" the words are not actiona$le in the%sel!es+ when the special da%age co%plained o" results( <hen the loss occurs(
@7( /or co%pensation li$el( @B( /or co%pensation "or slander(
"or
T=ne yearU T=ne yearU
@6( /or co%pensation "or T=ne yearU loss o" ser!ice occasioned $y the seduction o" the plainti""Hs ser!ant or daughter( @6( /or co%pensation "or T=ne yearU including a person to $reak a contract with the plainti""( @C( /or co%pensation "or T=ne yearU an illegal+ irregular or e9cessi!e distress( @5( /or co%pensation "or T=ne yearU wrong"ul sei2ure o" %o!a$le property under legal process( ?0( 4gainst a carrier "or T=ne yearU co%pensation "or losing or inDuring goods( ?1 4gainst a carrier "or T=ne yearU co%pensation "or nondeli!ery o"+ or delay in deli!ering goods( T=ne yearU T=ne yearU T=ne yearU /art VC+++T'o =ears ?@( 4gainst one who+ ha!ing a right to use#wo years property "or speci"ic purposes+ per!erts it to other purposes( ??( nder the Legal ;epresentati!esH :uit#wo years 4ct+ 1CBB+ against an e9ecutor( ?7( nder the sa%e 4ct#wo years against an ad%inistrator( ?B( nder the sa%e 4ct#wo years against any other representati!e( ?6( /or co%pensation "or ( #wo years 272
#he date o" the $reach
#he date o" the distress( #he date o" the sei2ure(
<hen the loss o" inDury occurs
<hen the goods ought to $e deli!ered(
=""icer o" ;a!en <hen the per!ersion "irst $eco%es known to the person inDured there$y( <hen the wrong co%plained o" is done( -'itto-'itto<hen the %al"easance+
Banking Laws and Practices-BNK 601 any %al"easance %is"easance or non"easance independent o" contract and not herein specially pro!ided "or( ?6( /or co%pensation "or o$structing a way "or a watercourse( ?C( /or co%pensation "or di!erting a watercourse( ?5( /or co%pensation "or ((( trespass upon #hree years i%%o!a$le property( 70( /or co%pensation "or in"ringing#hree years copyright or any other e9clusi!e pri!ilege( 71( #o restrain waste( #hree years 7@( /or co%pensation "or #hree years inDury caused $y an inDunction wrong"ully o$tained( 7?( nder the B0T:uccession 4ct+ 15@B+ #hree years section ?60 or section ?61+U $y a person to who% an e9ecutor or ad%inistrator has paid a legacy or distri$uted assets( 77( By a ward who has #hree years attained %aDority+ to set aside a trans"er o" property $y his guardian( 76( By any person $ound #hree years $y an order respecting the possession o" i%%o!a$le property %ade under the Code o" Cri%inal Procedure Code+ 1C5C+ B?TVVU or $y any one clai%ing under such person+ to reco!er the property co%prised in such order( 7C( /or speci"ic %o!a$le #hree years property lost or ac*uired $y the"t+ or dishonest %isappropriation or con!ersion+ or "or co%pensation "or wrong"ully taking or detaining the sa%e( BBT7C-4( #o reco!er #hree years %o!a$le property con!eyed or $e*ueathed in trust+ deposited or pawned+ and a"terwards $ought "ro% the trustee+ depository or Pawnee "or a !alua$le consideration( B6T7C-B( #o set aside sale o" %o!a$le #hree years property co%prised in a 1indu+ -uha%%adan or Buddhist religious or charita$le endow%ent %ade $y a %anager thereo" "or a !alua$le consideration( 75( /or other speci"ic %o!a$le property+ or #hree years "or co%pensation "or wrong"ully taking or inDuring or wrong"ully detaining the sa%e( %is"easance takes place( or
VU non"easance
/ART ?VC+++T)ree =ears #hree years#he date o" the o$struction( #hree years #he date o" the di!ersion #hree years #he date o" the di!ersion #he date o" trespass( #he date o" the in"ringe%ent( <hen the waste $egins( <hen the inDunction ceases(
#he date o" the pay%ent or distri$ution
<hen the ward attains %aDority(
#he date o" the "inal order in the case
#he possession o" the property "irst learns in whose possession it is(
<hen the sa%e $eco%es known to the plainti""(
<hen the sale $eco%es known to the plainti""U
<hen the property is wrong"ully taken or inDured+ or when the detainerHs possession 273
Banking Laws and Practices-BNK 601 B0( /or the hire o" ani%als+ !ehicles+ $oats #hree years or household "urniture( B1( /or the $alance o" %oney ad!anced in #hree years pay%ent o" goods to $e deli!ered( BCB@( /or the price o" #hree years goods sold and deli!ered+ where no "i9ed period o" credit is agreed upon( B5B?( /or the price o" goods sold and#hree years deli!ered to $e paid "or a"ter the e9piry o" a "i9ed period o" credit( B7( /or the price o" #hree years goods sold and deli!ered to $e paid "or $y a $ill o" e9change+ no such $ill $eing gi!en BB( /or the price o" #hree years trees or growing crops sold $y the plainti"" to the de"endant where no "i9ed period o" credit is agreed upon( B6( /or the price o" #hree years work done $y the plainti"" "or the de"endant at his re*uest+ where no ti%e has $een "i9ed "or pay%ent( 61B6( /or %oney paya$le "or %oney lent( #hree years BC( Like suit when the #hree years lender has gi!en a che*ue "or the %oney( 6@B5( /or %oney lent #hree years under an agree%ent that it shall $e paya$le on de%and( 60( /or %oney deposited #hree years under an agree%ent that it shall $e paya$le on de%and including %oney o" a custo%er in the hands o" his $anker so paya$le( 6761( /or %oney paya$le #hree years to the plainti"" "or %oney paid "or the de"endant( 6@( /or %oney paya$le #hree years $y the de"endant to the plainti"" "or %oney recei!ed $y the de"endant "or the plainti""Hs use( 6B6?( /or %oney paya$le #hree years "or interest upon %oney due "ro% the de"endant to the plainti""( 6667( /or %oney paya$le to the plainti"" "or #hree years %oney "ound to $e due "ro% the de"endant to the plainti"" on accounts stated $etween 274
VU $eco%es unlaw"ul( <hen the hire $eco%es paya$le( <hen the goods ought to $e deli!ered( #he date o" the deli!ery o" the goods( <hen the period o" credit e9pires( <hen the period proposed $ill elapses o" the
#he date o" the sale(
<hen the work is done
<hen the loan is %ade <hen the che*ue is paid
<hen the loan is %ade(
<hen the de%and is %ade(
<hen the %oney is paid(
<hen the %oney is recei!ed(
<hen the interest $eco%es due(
<hen the accounts are stated in writing signed $y the de"endant or his agent duly authori2ed in
VU this $ehal"+ unless where the de$t is+ $y a si%ultaneous agree%ent in writing signed as a"oresaid+ %ade paya$le at a "uture ti%e+ and then when that ti%e arri!es( <hen the de$t $eco%es paya$le( <hen the ti%e speci"ied arri!es or the contingency happens(
the%(
66674( nder =rder SSSV,, o" the Code #hree years o" Ci!il Procedure( 6B( /or co%pensation #hree years "or $reach o" a pro%ise to do anything at a speci"ied ti%e+ or upon the happening o" a speci"ied contingency( 6566( =n a single $ond+ #hree years where a day is speci"ied "or pay%ent( 6066( =n a single $ond+ #hree years where no such day is speci"ied( 616C( =n a $ond su$Dect #hree years to a condition( 6@65( =n a $ill o" e9change or pro%issory #hree years note paya$le at a "i9ed ti%e a"ter date( 6?60( =n a $ill o" e9change paya$le at sight#hree years or a"ter sight+ $ut not at a "i9ed ti%e( 6761( =n a $ill o" #hree years e9change accepted paya$le at a particular place( 666@( =n a $ill o" e9change or pro%issory #hree years note paya$le at a "i9edti%e a"ter sight or a"ter de%and( 666?( =n a $ill o" e9change or pro%issory #hree years note paya$le on de%and and not acco%panied $y any writing restraining or postponing the right to sue( #hree years 6C67( =n a pro%issory note or $ond paya$le $y install%ents( 656B( =n a pro%issory #hree years note or $ond paya$le $y install%ent+ which pro!ides that i" de"ault $e %ade in pay%ent o" one or %ore install%ents+ the whole shall $e due( C066( =n a pro%issory #hree years note gi!en $y the %aker to a third person to $e deli!ered to the payee a"ter a certain e!ent should happen(
#he day so speci"ied(
#he date o" e9ecuting the $ond(
<hen the condition is $roken( <hen the $ill or note "alls due( <hen the $ill is presented( <hen the $ill is presented at that place( <hen the "i9ed ti%e e9pires(U
#he date o" the $ill or note(
#he e9piration o" the "irst ter% o" pay%ent as to the part then paya$leJ and "or the other parts the e9piration o" the respecti!e ter%s o" pay%ent( <hen the de"ault is %ade+ unless where the payee or o$lige wai!es the $ene"it o" the pro!ision+ and then when "resh de"ault is %ade in respect o" which there is no such wai!er #he date o" the deli!ery to the payee(
275
Banking Laws and Practices-BNK 601 C@66( =n a dishonored #hree years "oreign $ill where protest has $een %ade and notice gi!en( C?6C( By the payee against the drawer o" a #hree years $ill o" e9change which has $een dishonored $y non-acceptance( C765( By the acceptor #hree years o" an acco%%odation $ill against the drawer( CBC0( :uit on a $ill o" e9change+ pro%issory#hree years note+ or $ond not herein e9pressly pro!ided "or C1( By a surety against #hree years the principal de$tor( #hree years C@(By a surety against a co-surety( C?( pon any contract to inde%ni"y( other #hree years #hree years C7( By an attorney or !akil "or his costs o" a suit or a particular $usiness+ there $eing no e9press agree%ent as to the ti%e when such costs are to $e paid( CB( /or the $alance due on a %utual+ open and current account+ where there ha!e $een reciprocal de%ands $etween the parties( #hree years
VU <hen the notice is gi!en(
#he date o" the re"usal to accept(
<hen the acceptor pays the a%ount o" the $ill( <hen the $ill+ note or $ond $eco%es paya$le( <hen the surety pays the creditor( <hen the surety pays anything in e9cess o" his own share( <hen the plainti"" is actually dandi"ied( #he date o" the ter%ination o" the suit or $usiness+ or 3where the attorney or !akil properly discontinues the suit or $usiness8 the date o" such discontinuance( #he close o" the years in which the last ite% ad%itted or pro!ed is entered in the accountJ such year to $e co%puted as in the account( CCT3a8 #he date o" the death o" the deceased(
C6( C6T3a8 =n a policy #hree years o" insurance when the su% insured is paya$le a"ter proo" o" the death has $een gi!en to or recei!ed $y the insurers( 3$8 =n a policy o" 3$8 #he date o" insurance when the su% occurrence causing insured is paya$le a"ter loss(U proo" o" the loss has $een gi!en to or recei!ed $y the insurers8( C6( By the assured #hree years reco!er pre%ier paid under a policy !oida$le at the election o" the insurers( CC( 4gainst a "actor "or an account( #hree years
the the
<hen the insurers elect to a!oid the policy( <hen the account is+ during the continuance o" the agency+ de%anded and re"used or+ where no such de%and is %ade+ when the agency ter%inates( 'itto
C5( By a principal against his agent "or %o!a$le property recei!ed $y the latter and not 276
#hree years
Banking Laws and Practices-BNK 601 accounted "or( 50( =ther suits principals against "or neglect or %isconduct( 51( #o cancel or aside an instru%ent otherwise pro!ided "or( $y agents set not #hree years
VU <hen the neglect or %isconduct $eco%es known to the plainti""( <hen the "acts entitling the plainti"" to ha!e the instru%ent cancelled or set aside $eco%e known to hi%( <hen the issue or registration $eco%es known to the plainti""( #he date o" the atte%pt(
#hree years
5@( #o declare the #hree years "orgery o" an instru%ent issued or registered( 5?( #he declare the #hree years "orgery o" an instru%ent atte%pted to $e en"orced against the plainti""( 57( /or property which #hree years the plainti"" has con!eyed while insane( 5B( #o set aside a decree o$tained $y "raud+#hree years or "or other relie" on the ground o" "raud( 56( /or relie" on the #hree years ground o" %istake( 56( /or %oney paid upon an e9isting#hree years consideration which a"terwards "ails( 5C( #o %ake good out o" #hree years the general estate o" a deceased trustee the loss occasioned $y a $reach o" trust( 55( /or contri$ution #hree years $y a party who has paid the whole or %ore than his share o" the a%ount due under a Doint decree+ or $y a sharer in a Doint estate who has paid the whole or %ore than his share o" the a%ount o" re!enue due "ro% hi%sel" and his co-shares( 100( By a co-trustee #hree years to en"orce against the estate o" the deceased trustee a clai% "or contri$ution( 101( /or a sea%anHs wages( #hree years 10@( /or wages not otherwise e9pressly#hree years pro!ided "or $y this :chedule( 10?( By 5?T-usli%U "or #hree years eligi$le dower 3%uaDDal8( 3<here+ during the continuance o" the %arriage no such de%and has $een %ade8 when the %arriage is dissol!ed $y death or di!orce(
<hen the plainti"" is restored to sanity+ and has knowledge o" the con!eyance( <hen the "raud $eco%es known to the party wronged( <hen the %istake $eco%es known to the plainti""( #he date o" the "ailure( #he date o" the trusteeHs death+ or+ i" the loss has not then resulted the date o" the loss(
#he date o" the pay%ent in e9cess o" the plainti""Hs own share(
<hen the right to contri$ution accrues( #he end o" the !oyage during which the wages are earned( <hen the wages accrue due <hen the dower is de%anded and re"used or
277
Banking Laws and Practices-BNK 601 107( By a 57T-usli%U "or #hree years de"erred dower 3%uaDDal8( 10B( By a %ortgagor #hree years a"ter the %ortgage has $een satis"ied+ to reco!ery surplus collections recei!ed $y the %ortgagee 106( /or an account and #hree years a share o" the pro"its o" a dissol!ed partnership( 106( By the %anager o" a Doint estate o" an #hree years undi!ided "a%ily "or contri$ution+ in respect o" a pay%ent %ade $y hi% on account o" the estate( 10C( By a lesser "or #hree years the !alue o" trees cut down $y his lessee contrary to the ter%s o" the lease( 105( /or the pro"its o" i%%o!a$le property#hree years $elonging to the plainti"" which ha!e $een wrong"ully recei!ed $y the de"endant( 110( /or arrears o" #hree years rent( #hree years 111( By a !endor o" i%%o!a$le property "or personal pay%ent o" unpaid purchase-%oney( 11@( /or a call $y a #hree years co%pany registered under any :tatute or 4ct( 11?( /or speci"ic #hree years per"or%ance o" a contract(
VU <hen the %arriage is dissol!ed $y death or di!orce( <hen the %ortgagor re-enters on the %ortgaged property(
#he date o" the dissolution(
#he date o" the pay%ent(
<hen the trees are cut down(
<hen the pro"its are recei!ed(
<hen the arrears $eco%e due( #he ti%e "i9ed "or co%pleting the sale+ or 3where the title is accepted a"ter the ti%e "i9ed "or co%pletion8 the date o" the acceptance( <hen the call is paya$le(
117( /or the rescission o" a contract(
#hree years
#hree years 11B( /or co%pensation "or the $reach o" any contract+ e9press or i%plied+ not in writing registered and not herein specially pro!ided "or( /art V??C +++SiB #earsC :i9 years
#he date "i9ed "or the per"or%ance+ or i" no such date is "i9ed+ when the plainti"" has notice that per"or%ance is re"used( <hen the "acts entitling the plainti"" to ha!e the contract rescinded "irst $eco%e known to hi%( <hen the contract is $roken+ or 3where there are successi!e $reaches8 when the $reach in respect o" which the suit is instituted occurs+ or 3where the $reach is continuing8 when it ceases( <hen the period o" li%itation would $egin to run against a suit $rought on a si%ilar contract not registered
116( /or co%pensation "or the $reach o" a contract in writing registered( 278
Banking Laws and Practices-BNK 601 116( pon a "oreign Dudg%ent as de"ined in :i9 years the Code o" Ci!il Procedure+ 150C( 11C( #o o$tain a :i9 years declaration that an alleged adoption is in!alid+ or ne!er+ in "act+ took place( 115( #o o$tain a :i9 years declaration that an adoption is !alid( 1@0( :uit "or which no :i9 years period o" li%itation is pro!ided elsewhere in this schedule( 1@1( #o a!oid #wel!e years encu%$rances or conclusi!e( nder tenures in an entire estate sold "or arrears o" >o!ern%ent re!enue+ or in a patni talu* or other salea$le tenure sold "or arrears o" rent( 1@@( pon a Dudg%ent #wel!e years o$tained in 56TPakistanU or a recogni2ance( 1@?( /or a legacy or #wel!e years "or a share o" a residue $e*ueathed $y a testator+ or "or a distri$uti!e share o" the property o" an intestate( #wel!e years 1@7( /or possession o" hereditary o""ice
VU #he date o" the Dudg%ent <hen the alleged adoption $eco%es known to the plainti""( <hen the rights o" the adopted son+ as such are inter"ered with( <hen the right to sue accrues(
<hen the sale $eco%es "inal and conclusi!e
#he date o" the Dudg%ent or recogni2ance( <hen the legacy or share $eco%es paya$le or deli!era$le(
1@B( :uit during the #wel!e years li"e o" a 1indu or 1T-usli%U "e%ale $y a 1indu or 1T-usli%U who+ i" the "e%ale died at the date o" instituting the suit would $e entitled to the possession o" land+ to ha!e an alienation o" such land %ade $y the "e%ale declared to $e !oid e9cept "or her li"e or until her re%arriage( 1@6( By a 1indu #wel!e years go!erned $y the law o" the -itakshara to set aside his "atherHs alienation o" ancestral property( 1@6( By a person #wel!e years e9cluded "ro% Doint "a%ily property to en"orce a right to share therein( 1@C( By a 1indu "or #wel!e years arrears o" %aintenance
<hen the de"endant takes possession o" the o""ice ad!ersely to the plainti""( )9planation( ---4n hereditary o""ice is possessed when the pro"its thereo" are usually recei!ed+ o" 3i" there are no pro"its8 when the duties thereo" are usually per"or%ed( #he date o" the alienation(
<hen the aliened takes possession o" the property
<hen the e9clusion $eco%es known to the plainti""( <hen the arrears are paya$le(
279
Banking Laws and Practices-BNK 601 1@5( By a 1indu "or a #wel!e years declaration o" his right to %aintenance( 1?0( /or the resu%ption #wel!e years or assess%ent o" rent"ree land( 1?1( #o esta$lish a #wel!e years periodically recurring right( 1?@( #o en"orce pay%ent #wel!e years o" %oney charged upon i%%o!a$le property( 7T)9planation+--- /or the purposes o" this article--3a8 the allowance and "ees respecti!ely called %alikana and ha**s+ and 3$8 the !alue o" any agricultural or other produce the right to recei!e which is secured $y a charge upon i%%o!a$le property+ BTand 3c8 ad!ances secured $y %ortgage $y deposit o" title deedsU( shall $e dee%ed to $e %oney charged upon i%%o!a$le property( 6TVVVVVVVVVVVVVU 1?7( #o reco!er #wel!e years possession o" i%%o!a$le property con!eyed or -$e*ueathed in trust or %ortgaged and a"terwards trans"erred $y the trustee or %ortgagee "or a !alua$le consideration( CT1?74( #o set aside a #wel!e years trans"er o" i%%o!a$le property co%prised in a 1indu+ 5T-usli%U or Buddhist religious or charita$le endow%ent %ade $y a %anager thereo" "or a !alua$le consideration( 1?7B( BI the %anager o" #wel!e years a 1indu+ 5T-usli%U or Buddhist religious or charita$le endow%ent to reco!er possession o" i%%o!a$le property co%prised in the endow%ent which has $een trans"erred $y pre!ious %anager "or a !alua$le consideration( 1?7C( By the %anager o" #wel!e years a 1indu+ 5T-usli%U or Buddhist religious or charita$le endow%ent to reco!ery possession o" %o!a$le property 280
VU <hen the right is denied( <hen the right to resu%e or assess the land "irst accrues( <hen the plainti"" is "irst re"used the enDoy%ent o" the right( <hen the %oney sued "or $eco%es due
6T<hen the trans"er $eco%es known to the plainti""(U
<hen the trans"er $eco%es known to the plainti""(
#he death+ resignation re%o!al o" the trans"eror
or
#he death+ resignation re%o!al o" the seller(
or
Banking Laws and Practices-BNK 601 co%prised in the endow%ent which has $een sold $y a pre!ious %anager "or a !alua$le consideration( 1?B( :uit instituted in #wel!e years a Court 11Tother than a 1igh CourtU $y a %ortgagee "or possession o" i%%o!a$le property %ortgaged( 1?6( By a purchaser at #wel!e years a pri!ate sale "or possession o" i%%o!a$le property sold when the !endor was out o" possession at the date o" the sale( 1?6( Like suit $y a purchaser at a sale in#wel!e years e9ecution o" a decree when the Dudg%entde$tor was out o" possession at the date o" the sale( 1?C( Like suit $y a purchaser at a sale in#wel!e years e9ecution o" a decree when the Dudg%entde$tor was in possession at the date o" the sale( 1?5( By a landlord to #wel!e years reco!er possession "ro% a tenant( 170( By a re%ainder %an+ #wel!e years a re!ersionary 3other than a landlord8 or a de!isee+ "or possession o" i%%o!a$le property( 171( Like suit $y a 1indu or 17T-usli%U #wel!e years entitled to the possession o" i%%o!a$le property on the death o" a 1indu or 17T-usli%U "e%ale( 17@( /or possession o" #wel!e years i%%o!a$le property when the plainti""+ while in possession o" the property+ has $een dispossessed or has discontinued the possession( 17?( Like suit+ when the #wel!e years plainti"" has $eco%e co%e entitled $y reason o" any "or"eiture or $reach o" condition( 1BT=%ittedU( 17B( 4gainst a depository or Pawnee to#hirty years reco!er %o!a$le property deposited or pawned( 176( Be"ore a 16T1igh CourtU in the e9ercise#hirty years o" its ordinary original ci!il Durisdiction $y a %ortgagee to reco!er "ro% the %ortgagor the possession o" i%%o!a$le property %ortgaged( 1764( By or on $ehal" o" any local authority#hirty years "or possession o" any pu$lic street or road or
VU
<hen the %ortgagorHs right to possession deter%ines(
<hen the !endor is "irst entitled to possession(
<hen the Dudg%ent-de$tor is "irst entitled to possession(
#he date when the sale $eco%es a$solute(
<hen the tenancy is deter%ined( <hen his estate "alls into possession(
<hen the "e%ale dies(
#he date o" the dispossession or discontinuance(
<hen the "or"eiture is incurred or the condition is $roken(
#he date o" the deposit or pawn(
<hen any part o" the principal or interest was last paid on account o" the %ortgage-de$t(
#he date o" the dispossession or discontinuance 281
Banking Laws and Practices-BNK 601 any part thereo" "ro% which it has $een dispossessed or o" which it has discontinued the possession( 176( By a %ortgagee "or :i9ty years "oreclosure or sale( :i9ty years
VU
17C( 4gainst a %ortgagee to redee% or to reco!er possession o" i%%o!a$le property %ortgaged(
175( 15T4ny suit $y Mor on $ehal" o" the 1CT:i9ty yearsU /ederalU@0 >o!ern%ent or any Pro!incial >o!ern%entU @1Te9cept a suit $e"ore the @@T:upre%e CourtU in the e9ercise o" its original DurisdictionU( 1B0( nder the Code o" Cri%inal Procedure+:e!en days 1C5C "ro% a sentence o" death passed $y a Court o" :ession @?Tor $y a 1igh Court in the e9ercise o" its original Cri%inal AurisdictionU( 1B1( /ro% a decree or order o" @BTa 1igh #wenty days CourtU in the e9ercise o" its original Durisdiction( 1B@( nder the Code o" Ci!il Procedure+#hirty days 150C to the Court o" a 'istrict Audge( 1B?( nder the sa%e Code to 1igh Court@6T#hird daysU "ro% an order o" a :u$ordinate Court re"using lea!e to appeal to @6T:upre%e CourtU( 1B7( nder the Code o" Cri%inal Procedure@CT#hirty daysU 1C5C+ to any Court other than a 1igh Court( 1BB( nder the sa%e Code to a 1igh Court+:i9ty days e9cept in the cases pro!ided "or $y 4rticle 1B0 and 4rticle 1B6( 1B6( nder the Code o" Ci!il Procedure+Ninety days 150C+ to a 1igh Court+ e9cept in the cases pro!ided "or $y 4rticle 1B1 and 4rticle 1B?( 1B6( nder the Code o" Cri%inal Procedure+:i9 %onths 1C5C+ "ro% an order o" ac*uittal( @5T1BC( nder the 4r$itration 4ct+ 1570+ to#hirty days set aside an award or to get an award re%itted "or reconsideration( 282
<hen the %oney secured $y the %ortgage $eco%es due( <hen the right to redee% or to reco!ery possession accrues& Pro!ided that all clai%s to redee% arising under instru%ents o" %ortgage o" i%%o!a$le property situate in Lower Bur%a which had $een e9ecuted $e"ore the "irst day o" -ay+ 1C6?+ shall $e go!erned $y the rules o" li%itation in "orce in that Pro!ince i%%ediately $e"ore the sa%e day( <hen the period o" li%itation would $egin to run under this 4ct against a like suit $y a pri!ate person( #he date o" the sentence(
#he date o" the decree or order(
#he date o" the decree or order appealed "ro%( #he date o" the order(
#he date o" the sentence or order appealed "ro%( #he date o" the sentence or order appealed "ro% #he date o" the decree or order appealed "ro%( #he date o" the order appealed "ro%( #he date o" ser!ice o" the notice o" "iling o" the award(
Banking Laws and Practices-BNK 601 1B5( /or lea!e to appear and de"end a suit ?@T#en daysU under su%%ary procedure re"erred to in section 1@C 3@83"8 ?0Tor under =rder SSSV,, o" the ?1TCode o" Ci!il Procedure+ 150CU( 160( /or an order under the sa%e Code+ to /i"teen days restore to the "ile an application "or re!iew reDected in conse*uence o" the "ailure o" the applicant to appear when the application was called on "or hearing( 161( /or a re!iew o" Dudg%ent $y a ??V ?@T/i"teen daysU Court o" s%all Causes ?7VVVV or $y a Court in!ested with the Durisdiction o" a ?BV Court o" :%all Causes when e9ercising that Durisdiction( 16@( /or a re!iew o" Dudg%ent $y ?6Ta 1igh #wenty days Court in the e9ercise o" its original Durisdiction( ?616@-4( T;epealedU( 16?( By a plainti"" "or an order to set aside a #hirty days dis%issal "or de"ault o" appearance or "or "ailure to pay costs o" ser!ice o" process or to "urnish security "or costs( #hirty days 167( By a de"endant+ "or an order to set aside a decree passed e9 parte( 16B( nder the Code o" Ci!il Procedure+?5T#hirty daysU 150C $y a person dispossessed o" i%%o!a$le property and disputing the right o" the decree-holder or purchaser at a sale in e9ecution o" a decree to $e put into possession( 166( nder the sa%e Code to set aside a sale?5T#hirty daysU in e9ecution o" a decree 70Tincluding any such application $y a Dudg%ent-de$torU( 166( Co%plaining o" resistance o"?5T#hirty daysU o$struction to deli!ery o" possession o" i%%o!a$le property decreed or sold in e9ecution o" a decree( 16C(/or the read%ission ?5T#hirty daysU o" an appeal dis%issed "or want o" prosecution ?5T#hirty daysU 165( /or the re-hearing o" an appeal heard e9 parte( ?5T#hirty daysU
VU <hen the su%%ons is ser!ed(
<hen the application "or re!iew is reDected(
#he date o" the dis%issal
#he date o" the decree or where the su%%ons was not duly ser!ed+ when the applicant has knowledge o" the decree( #he date o" the dispossession(
#he date o" the sale(
#he date o" the resistance or o$struction
#he date o" the dis%issal(
160( /or lea!e to appeal as a pauper(
#he date o" the decree in appeal+ or+ where notice o" the appeal was not duly ser!ed+ when the applicant has knowledge o" the decree( #he date o" the decree appealed "ro%( 283
Banking Laws and Practices-BNK 601 161( nder the Code o" Ci!il Procedure+:i9ty days 150C+ 7@T$y the legal representati!e o" a deceased plainti"" or de"endant "or setting aside an order or Dudg%ent %ade or pronounced in his a$senceU( 16@( nder the sa%e Code $y the assignee :i9ty days or the recei!er o" an insol!ent plainti"" or appellant "or an order to set aside the dis%issal o" a suit or an appeal( 16?( /or a re!iew o" Dudg%ent e9cept in theNinety days cases pro!ided "or $y 4rticle 161 and 4rticle 16@( 167( /or the issue o" a notice under the sa%e Ninety days Code+ to show cause why any pay%ent %ade out o" Court o" any %oney paya$le under a decree or any adDust%ent o" the decree should not $e recorded as certi"ied( 16B( /or pay%ent o" the a%ount o" a decree:i9 %onths $y install%ents( 166( nder the sa%e Code to ha!e the legal 7BTNinety days representati!e o" a deceased plainti"" or o" a deceased appellant %ade a party( 166( nder the sa%e Code to ha!e the legal 7BTNinety days representati!e o" a deceased de"endant or o" a deceased respondent %ade a party( 76T16C( nder the 4r$itration 4ct+ 1570+ "orNinety days the "iling in Court o" an award( 165( By a person desiring to appeal under Ninety days the 76TCode o" Ci!il Procedure+ 150CU to 7CTthe :upre%e CourtU "or lea!e to appeal( 1C0( By a purchaser o" i%%o!a$le property#hree years at a sale in e9ecution o" a decree "or deli!ery o" possession( 1C1( 4pplications "or which no period o" #hree years li%itation is pro!ided elsewhere in this schedule or $y section 7C o" the Code o" Ci!il Procedure+ 150C( B0T1C@( TV V V V V VU 1C?( #o en"orce a Dudg%ent+ decree or order B?T:i9 yearsU o" any B1T1igh CourtU in the e9ercise o" its ordinary original ci!il Durisdiction+ or an order o" B@3the :upre%e Court8(
VU 7?T#he date o" the order or Dudg%entU(
#he date o" the order o" dis%issal(
<hen the pay%ent adDust%ent is %ade(
or
#he date o" the decree( #he date o" the death o" the deceased plainti"" or appellant( #he date o" the death o" the deceased de"endant correspondent #he date o" ser!ice o" the notice o" the %aking o" the awardU( #he date o" the decree appealed "ro%( <hen the a$solute( sale $eco%es
<hen the right to apply accrues(
<hen a present right to en"orce the Dudg%ent+ decree or order accrues to so%e person capa$le o" releasing the right& Pro!ided that when the Dudg%ent+ decree or order has $een re!i!ed+ or so%e part o" the principal %oney secured there$y+ or so%e interest on such %oney has $een paid+ or so%e acknowledg%ent o" the right thereto has $een gi!en in
284
VU writing signed $y the person lia$le to pay such principal o" interest+ or his agent to the person entitled thereto or his agent+ the twel!e years shall $e co%puted "ro% the date o" such re!i!er pay%ent or acknowledg%ent or the latest o" such re!i!ers+ pay%ent or acknowledg%ents+ as the case %ay $e(
#he second schedule--- Tterritories re"erred to in section ?1(U ;ep( By the repealing and a%ending act+ 15?0 3!iii o" 15?08+ STAM/ ACT, 6-Contents 'e"initions& :ec @ ,nstru%ents chargea$le with duty& :ec ? Power to reduce+ re%it or co%pound duties& :ec 5 'uties how to $e paid& :ec 10 se o" adhesi!e sta%ps& :ec 11 Cancellation o" adhesi!e sta%ps& :ec 1@ :ta%p where !alue o" su$Dect-%atter is indeter%inate& :ec @6 'uties $y who% paya$le& :ec @5 ,nstru%ents not duly sta%ped inad%issi$le in e!idence+ etc& :ec ?B CollectorEs power to re"und penalty paid under section ?C+ su$-section 318& :ec ?5 Prosecution "or o""ence against :ta%p-law& :ec 7? Prosecution "or o""ence against :ta%p-law& :ec 7C Penalty "or e9ecuting+ etc(+ instru%ent not duly sta%ped& :ec 6@ Aurisdiction o" -agistrates ; < #his 4ct %ay $e called the :ta%p 4ct+ 1C55( ;!< ,t e9tends to the whole o" PakistanU( ;*< ,t shall co%e into "orce on the "irst day o" Auly+ 1C55( T)e signi%icant (rovisions o% Stam( Act, 68- are given in t)e %ollo'ing (aragra()s 7e%initions: Sec ! LCollectorPM -eans the Collector o" a districtJ and includes a T'istrict =""icer 3;e!enue8U and any o""icer who% Tthe Pro!incial >o!ern%entU %ay+ $y noti"ication in the =""icial >a2ette+ appoint in this $ehal"J Ldul# stam(edP+ as applied to an instru%ent+ %eans that the instru%ent $ears an adhesi!e or i%pressed sta%p o" not less than the proper a%ount and that such sta%p has $een a""i9ed or used in accordance with the law "or the ti%e $eing in "orce in TPakistanUJ LEBecutedP and LeBecutionP, used with re"erence to instru%ents+ %ean FsignedG and FsignatureG Lim(ressed stam(P includesL La$els a""i9ed and i%pressed $y the proper o""icer+ and :ta%ps e%$ossed or engra!ed on sta%ped paperJ L(o'er+o%+attorne#P includes any instru%ent 3not chargea$le with a "ee under the law relating to court"ees "or the ti%e $eing in "orce8 e%powering a speci"ied person to act "or and in the na%e o" the person e9ecuting itJ Copyright Virtual ni!ersity o" Pakistan 285
Banking Laws and Practices-BNK 601 VU LRecei(tP includes any note+ %e%orandu% or writingL <here$y any %oney+ or any $ill o" e9change+ che*ue or pro%issory note is acknowledged to ha!e $een recei!ed+ or <here$y any other %o!a$le property is acknowledged to ha!e $een recei!ed in satis"action o" a de$t+ or <here$y any de$t or de%and+ or any part o" a de$t or de%and+ is acknowledged to ha!e $een satis"ied or discharged+ or <hich signi"ies or i%ports any such acknowledg%ent and whether the sa%e is or is not signed with the na%e o" any person AR&?TRAT?ON ACT, -18 Main Contents: 1istory. )!olution =$Dect ,nterpretation 4pplication ;ole o" 4r$itrator 'e"initionsN4r$itration 4gree%ent+ 4ward+ %pire Pro!isions i%plied in ar$itration agree%ent& :ec ? 4gree%ent that ar$itrators $e appointed $y third party& :ec 7 4uthority o" appointed ar$itrator or u%pire irre!oca$le e9cept $y lea!e o" Court& :ec B Pro!ision as to appoint%ent o" three or %ore ar$itrators& :ec 10 Power to Court to re%o!e ar$itrators or u%pire in certain circu%stances& :ec 11 Powers o" ar$itrator& :ec 1? 4ward to $e signed and "iled& :ec 17 Power o" Court to %odi"y award& :ec 1B Audg%ent in ter%s o" award& :ec 16 Power o" Court to pass interi% orders& :ec 1C 4pplication to "ile in Court ar$itration agree%ent& :ec @0 Parties to suit %ay apply "or order o" re"erence& :ec @1 4ppoint%ent o" ar$itrator& :ec @@ Power to stay legal proceedings where there is an ar$itration agree%ent& :ec ?7 Object o% t)e Act: )n"orce%ent o" ar$itration agree%ent where$y the parties ha!e $ound the%sel!es down+ to ha!e their disputes arising out o" transaction to which such an agree%ent is applica$le+ adDudicated upon and decided $y the do%estic tri$unal( ?nter(retation: 4r$itration 4ct does not restrict the contractual rights o" the parties( ,t only gi!es e""ect to the choice o" the parties as regards the "oru% to which their disputes shall $e taken( 4pplication o" the 4ct& #his act lays down the rules to $e "ollowed $y the parties+ ar$itrators and courts( #he 4r$itration 4ct 315708 Role o% Arbitrator: 4r$itrator is to settle dispute $etween parties a%ica$ly $y a!oiding all type o" technicalities o" procedural law $ut within the "our corners o" su$stanti!e law and to pro!ide a do%estic "oru% "or speedy disposal o" dispute( 4r$itration is undertaken through persons to who% $oth the parties repose their trust( Comments: 286 Copyright Virtual ni!ersity o" Pakistan
Banking Laws and Practices-BNK 601 VU )9istence o" a dispute is essential "or a re"erence to $e resol!ed through adDudication o" such dispute cul%inating in an award( 7e%initions Arbitration Agreement& %eans written agree%ent to su$%it present or "uture di""erences to ar$itration+ whether an ar$itrator was na%ed therein or not( Court: would %ean a ci!il court ha!ing Durisdiction to decide the su$Dect %atter( A'ard: %eans ar$itration award( #he decision o" ar$itration or ar$itrator is called 4ward( Llegal re(resentativeP %eans a person who in law represents the estate o" a deceased person+ and includes any person who inter%eddles with the estate o" the deceased+ and+ where a party acts in a representati!e character+ the person on who% the estate de!ol!es on the death o" the party so actingJ Re%erence: %eans re"erence to ar$itration any disputes( 4r$itrators to %ake decision within "our %onths( Um(ire: is a person+ or $ody o" persons 3o"ten appointed $y the ar$itrators the%sel!es8 who is to settle any di""erence that %ay arise $etween the ar$itrators( Aut)orit# o% a((ointed arbitrator or um(ire irrevocable eBce(t b# leave o% Court: Sec 0 #he authority o" an appointed ar$itrator o" u%pire shall not $e re!oca$le e9cept with the lea!e o" the Court+ unless a contrary intention is e9pressed in the ar$itration agree%ent /o'er to Court to remove arbitrators or um(ire in certain circumstances: Sec ; < #he Court %ay+ on the application o" any party to a re"erence+ re%o!e an ar$itrator or u%pire who "ails to use all reasona$le dispatch in entering on and proceeding with the re"erence and %aking an award( ;!< #he Court %ay re%o!e an ar$itrator or u%pire who has %isconduct hi%sel" or the proceedings( ;*< <here an ar$itrator or the u%pire is re%o!ed under this section+ he shall not $e entitled to recei!e any re%uneration in respect o" his ser!ices( ;1< /or the purposes o" this section the e9pression Fproceeding with the re"erenceG includes+ in a case where re"erence to the u%pire $eco%es necessary+ gi!ing notice o" that "act to the parties and to the u%pire( /o'ers o% arbitrator: Sec * ;a<C #he ar$itrators or u%pire shall+ unless a di""erent intention is e9pressed in agree%ent+ ha!e power to 3a8 ad%inister oath to the parties and witnesses appearingJ ;b<C state a special case "or the opinion o" the Court on any *uestion o" law in!ol!ed+ or state the award+ wholly or in part+ in the "or% o" a special case o" such *uestion "or the opinion o" the CourtJ ;c<C #he ar$itrators or u%pire shall+ unless a di""erent intention is e9pressed in agree%ent+ ha!e power to 3c8 %ake the award conditional or in the alternati!eJ ;d<C Correct in an award any clerical %istake or error arising "ro% any accidental slip or o%issionJ ;e<C 4d%inister to any party to ar$itration such interrogatories as %ay+ in the opinion o" the ar$itrators or u%pire+ $e necessary A'ard to be signed and %iled: Sec 1 ; < <hen the ar$itrators or u%pire ha!e %ade their award+ they shall sign it and shall gi!e notice in writing to the parties o" the %aking and signing thereo" and o" the a%ount o" "ees and charges paya$le in respect o" the ar$itration and award( ;!< #he ar$itrators or u%pire shall+ at the re*uest o" any party to the ar$itration agree%ent or any person clai%ing under such party or i" so directed $y the Court and upon pay%ent o" the "ees and charges due in respect o" the ar$itration and award and o" the costs and charges o" "iling the award+ cause the award or a signed copy o" it+ together with any depositions and docu%ents which %ay ha!e $een taken and pro!ed $e"ore the%+ to $e "iled in the Court+ and the Court shall thereupon gi!e notice to the parties o" the "iling o" the award( Copyright Virtual ni!ersity o" Pakistan 287
Banking Laws and Practices-BNK 601 VU ;*< <here the ar$itrators or u%pire state a special case under clause 3$8 o" :ection 1?+ the Court+ a"ter gi!ing notice to the parties and hearing the%+ shall pronounce its opinion thereon and such opinion shall $e added to+ and shall "or% part o"+ the award( /o'er o% Court to modi%# a'ard : Sec 0 #he Court %ay $y order %odi"y or correct an award <here it appears that a part o" the award is upon a %atter not re"erred to ar$itration and such part can $e separated "ro% the other part and does not a""ect the decision on the %atter re"erredJ or <here the award is i%per"ect in "or%+ or contains any o$!ious error which can $e a%ended without a""ecting such decisionJ or <here the award contains a clerical %istake or an error arising "ro% an accidental slip or o%ission( @udgment in terms o% a'ard: Sec 5 <here the Court sees no cause to re%it the award or any o" the %atters re"erred to ar$itration "or reconsideration or to set aside the award+ the Court shall+ a"ter the ti%e "or %aking an application to set aside the award has e9pired+ or such application ha!ing $een %ade+ a"ter re"using it+ proceed to pronounce Dudg%ent according to the award+ and upon the Dudg%ent so pronounced a decree shall "ollow and no appeal shall lie "ro% such decree e9cept on the ground that it is in e9cess o"+ or not otherwise in accordance with+ the award( Contract act Main Content: :cope and its signi"icance Consideration 'e"inition o" contract ContractsN)ssentials and Kinds ContractDsco(e and its $inds #he law relating to contracts in Pakistan is go!erned $y Contract 4ct+ 1C6@( ,t e9tends to the whole o" PakistanJ and it ca%e into "orce on 1 st :epte%$er+ 1C6@( 4t the ti%e o" pro%ulgation+ this 4ct co%prised o" @66 sections( Sco(e and Signi%icance: #he law o" contract is at the root o" any $usiness transaction( <e ha!e already discussed that it a""ects e!ery person in one way or the other( <e enter into di""erent kinds o" contracts in our day today a""airs( #he law o" contracts is applica$le not only to the $usiness co%%unity $ut also to others( <hen a person rides a pu$lic transport or gets ad%ission in an educational institution or a!ails loan "ro% a $ank or deli!ers cloth to a tailor "or stitching+ he is in "act entering into a contract+ knowingly or unknowingly( By !irtue o" a contract legal rights and o$ligations are created $etween the contracting parties( #he law o" contracts is concerned with sel"-i%posed o$ligations( #he parties to a contract do enDoy "reedo% o" contract and the rights and duties created $y the% can $e en"orced e!en though the ter%s o" the contract are harsh or un"air to one party( <hen people enter into a contract they %ake pri!ate law $inding on each other( #he parties to a contract+ in a sense+ %ake the law "or the%sel!es( ,t consists o" a nu%$er o" li%iting principles+ su$Dect to which the parties %ay create rights and duties "or the%sel!es which the law will uphold( #hus we can say that the parties to a contract+ in a sense+ %ake the law "or the%sel!es( <hen contracts were entered into "reely and !oluntarily they would $e en"orcea$le $y courts o" law( #he law o" contract deter%ines the circu%stances under which a pro%ise or an agree%ent shall $e legally $inding on the persons %aking it( ,t also pro!ides the re%edies which are a!aila$le in a court o" law against a person who "ails to "ul"ill his contract and other conditions( #he o$Dect and "unction o" law o" contract is to see that pro%ises %ade $y the contracting parties are "ul"illed( ContractDde%ined F4n agree%ent en"orcea$le $y law is a contractG Copyright Virtual ni!ersity o" Pakistan 288
Banking Laws and Practices-BNK 601 VU 4gree%entNde"ined :ec @3e8 )!ery pro%ise or e!ery set o" pro%ises+ "or%ing the consideration "or each other+ is an agree%ent( /romiseDde%ined Sec ! ;b< <hen the person to who% the proposal is %ade signi"ies his assent thereto+ the proposal is said to $e accepted( 4 proposal when accepted $eco%es a pro%ise( ConsiderationDde%ined Sec ! ;d< <hen at the desire o" the Pro%isor+ the Pro%isee or any other person who has done or a$stained "ro% doing+ or does or a$stains "ro% doing+ or pro%ises to do or to a$stain "ro% doing+ so%ething+ such act or a$stinence or pro%ise is called a consideration "or the pro%ise( ?m(ortant ingredients o% Contract: #o understand the de"inition o" contract we need to understand the "ollowing de"initions on which a contract is $ased( Proposal 4cceptance Pro%ise Pro%isor Pro%isee Consideration 4gree%ent According to section 8 o% Contract Act 65!N 4ll agree%ents are contracts i" they are %ade $y the "ree consent o" parties co%petent to contract+ "or a law"ul consideration and with a law"ul o$Dect+ and are not here$y e9pressly declared to $e !oid( Essentials o% valid Contract =""er and acceptance Legal relationship Legal consideration Co%petent parties /ree consent o" the parties Conce(t o% com(etent (arties Parties to contract are re*uired to $e o" the age o" %aDority( =" sound %ind 0 Not $arred "ro% entering into contracts $y the operation o" law( ContractsN)ssentials Conce(t o% %ree consent: Consent shall $e treated as "ree i" not o$tained $y& Coercion ndue in"luence /raud -isrepresentation
289

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Banking Laws and Practices-BNK 601 Table of Contents

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Banking laws and practices-BNK 601 COURSE MANAGEMENT

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Banking Laws and Practices-BNK 601 4EGA4 S=STEM O" /A>?STAN

Banking Laws and Practices-BNK 601

indiscri%inately to all kinds o" actionG(

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Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601

When National Assembly is in Session

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Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601

&orro'er S(enders: "inancial Mar$et 7irect "inance

&usiness "irmsC GovernmentC Aouse)olds "oreigners(

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Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601 EVO4UT?ON O" &AN>?NG

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Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601 &AN>?NG COM/AN?ES OR7?NANCE, -.!

Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601 &AN>?NG COM/AN?ES OR7?NANCE, -.!

Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601 &AN>?NG COM/AN?ES OR7?NANCE, -.!

Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601

Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

VU %aintained under Control8 4ct+ 1576

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601

Banking Laws and Practices-BNK 601

Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601 &AN>ER+CUSTOMER RE4AT?ONSA?/

Copyright Virtual ni!ersity o" Pakistan

Banking Laws and Practices-BNK 601 &AN>ER+CUSTOMER RE4AT?ONSA?/

Banking Laws and Practices-BNK 601

Banking Laws and Practices-BNK 601

Copyright Virtual ni!ersity o" Pakistan

Banking Laws & Practices - BNK601 Handouts

Banking Laws & Practices - BNK601 Handouts