COMMERCIAL LENDING

Fund Based Non-Fund Based

1 Running Finance / Cash Finance
2 Demand Finance / Term Finance
3 Export Refinance Facility (ERF)
Segment Based Lending
Sector Wise (Textile, Petrochemical,
Financial, Pharma, Steel, FMCG, etc. )
Sector/Segment
Retail Lending (SE/Consumer)
Commercial Lending (ME/SME)
Corporate Lending
 Agri-Based Lending (Tool &
Implements, seeds, pesticides,
fertilizers, crop insurance)
Consumer (Personal Loans, Credit
Cards, Housing Finance)

Short Term Financing / Working

Capital Financing (Current Asset –
Current Liabilities)
Running Finance (Overdraft Limit)
Borrowed Money (bank has provided
you loan that is repayable by complying
with agreed terms and conditions)
Bank’s controlling office approved the RF
facility in favor of customers.
Markup amount depends upon
utilization of RF limit (The more limit you
utilize during the month and the more
that amount remains uppaid, more will
be the amount of markup that will be
payable at month end.
Let Say RF Rs 5M and entire amount is
withdrawn then R/F outstanding is Rs
5M.
Approved Limit Rs 10M
RF outstanding Rs. 4M
Balance Available Rs. 6M
Separate Bank A/c is opened for
customer in a separate bank ledger
which is generally known as RF Ledger
To facilitate Working Capital required by
customer
Cash Operating Cycle
Inventory + Receivables - Payables
Days Days Days
Turnover = Sales (CGS)
Inventory
Days Inventory, Receivables & Payables
Days Inventory = Inventory X 300
CGS
Days Receivables = Avg Receivables x 300
Credit Sales
Days Payable = Trade Payables x 300
CGS
Convention of 300 / 360 / 365 days based on
actual working days for particular business
Days Inventory + Days Receivable - Days
Payable= Net Cash Operating Cycle (Days)
Example: 50+40-45= 45
CGS x 360 (or 300 days as feasible)
NCOC (Days)
CGS x 360
NCOC (Days)
Calculation of Net Working Capital
Requirement

Forecasted / Projected Financial Statements

 Judgemental / Estimation / Expectation
 Difference of opinion between bank and
customer
  Under financing /(or it could lead up to over
financing
 Actual or True Financial Statements
indicating Actual Business Operating
Performance

Running Finance / Cash Finance

RF
Primary Security: Hypothecation of stocks
and/or Receivables.
Secondary Security: Pledge of stocks/Mortgage
of Property / Liquid security (Readily converted
to cash without legal intervention)
Rs. 20M stocks
Nature of RF/CF is same but product dynamics
are different
Both are W.C. Facilities, Short Term Facilities,
Funded Facilities.
CF (Pledge of movables assets (liquid
securities,stocks) (CF Facility against pledge of
stock)
Pledge: Asset (security) is under effective
control (lock &key) of the bank.

Stock in Godown / warehouse Rs 20M

CF (pledge) (Margin: 25%) Loan:Rs 15M
Safe Margin available
D/O Issue (Delivery Order)
Its an authority issued by bank to Mucaddam
(godown/warehouse keeper) to release specific
quantity/quality of goods to borrower
(customer)
500,000 worth of stock is required by customer
Customer bank a/c will be debited by bank
Cash deposited by customer towards
repayment of CF Loan: Rs. 667,000/=
500,000 = Rs.667,000
0.75
1-margin requirement = 1-0.25=0.75
Loan (o/s) : Security (Pledge of Stock)
15: 20
3:4
Mucaddam: Individual / (Mostly)
Firm/Corporate Entity
SECURITIES OFFERED BY CUSTOMERS TO
SECURE BANK LOANS
Hypothecation of Stocks (under control of
Customer / NO PLEDGE)
Pledge of Stock, under control of bank (CF
Product)
Properties as Security (Residential /
Commercial / Industrial / Agricultural)
Liquid Securities: (Bonds/ Stocks/Investment
Certificates)
Rs 15,000,000 – Rs 667,000 = Rs 14,333,000
Demand Finance Facility PKR 24M
Repay 24 Monthly Installments
1M per month customer pays to adjust the DF
Facility of 24M
TRADE FINANCE
Export Finance Scheme (EFS) SBP / Export
Refinance (ERF) (BANKS) SCHEMES
Suppliers Credit: Credit provided by supplier
(exporter) to buyer (importer)
EFS started in 1973 by SBP
SBP Funds involved
Concessionary Finance (markup rate < market
rate)
Max Tenor 180 days
Commercial Bank Fund NOT involved
To encourage exporter by meeting their
operating requirements
Country Foreign Exchange Reserves
Trade Balance / Current A/c improve
Max. Spread of Commercial Bank: 1% (bank
may reduced his share of 1% as per mutual
consent between bank and customer)
Example:
SBP EFS Rate= 9% + Comm. Bank Spread = 1%
Markup Rate Charged to Customer = 10%
Markup: 6 months weighted average T-Bill Rate
Soverign Debt: State Debt / Borrowing by GoP

1. Transaction Based / Case to Case

2. Performance Based
Customers’ export performance judged
through EE-Form / EF-Form
Pre-Shipment Facility ERF-I, ERF-II
 ERF-Part-I: On Case to Case / Consignment
Basis
  ERF-Part-II: Regular Limit instead of “case
to case basis”. Performance Based (More
like a RF)
 ERF-II: Annual Export performance should
be double the limit allowed
Per Forma Invoice / Indent

Post-Shipment Facility
Shipped on Board (Consignment has been
loaded on ship)
B/L (Bill of Lading) Airway Bill
R/R Railway Receipt Bill-T (Pronounced as BILTY)
Products
FAFB (SBP Concessionary Finace)
FBP (Commercial Bank Finance through
discounting of BoE)
ERF-I (Case to Case Basis)
Customer a/c credited against specific export
contract. Eg. USD 10,000/- financing will be
provided by Bank @ 10% margin.
USD 10,000 x 168 =PKR 1,680,000
PKR 1,680,000 x10% = PKR 168,000
Financing amount to be disbursed: 1.680M-
0.168M = PKR 1,512,000/-
Dr. Loan a/c Cr: Exporter’s A/c
PKR 1,512,000 PKR 1,512,000

Export Proceeds (Received from Thailand)

Treasury Deptt - Branch
Foreign Inward Remittance
USD 9,900/= (USD 100 - Transaction
settlement process Intermediary Bank
Charges)
USD rate has now gone down. 1USD= 166
USD 9,900 x 166 = PKR 1,643,400/-

Loan Disbursed PKR 1,512,000

Exp Proceeds (Net) PKR 1,643,400
Now we adjust our loan.

Dr: Customer (Exporter )a/c 1,557,000

Cr: Loan Account 1,512,000
Cr: Markup and Bank Charges 45,000
Surplus Funds credited to exporter’s deposit
a/c
1,643,400 – 1,557,000 = 86,400

3 documents x 20 =60 doucments processing /

financing
Sitara Group of Industries

ERF-II Limit Disbursement

Past Performance 250M x 2 = PKR 500M
Dr: Loan A/c 250,000,000 Cr: Exp A/c 250M
Next : 250M x 1.5 = PKR 375M during 2020
(Assumption: ERF Loan Disbursed on 1-1-20)
Actual Export Performance Sitara Group 625M
ERF-II Limit Adjustment
Dr: Exporter/Customer A/c Cr: Loan A/c
All export proceeds in Foreign Currency are
surrendered to SBP and Pak Rs Eq is credited to
customer a/c
Yield from Customer
1. Markup from ERF Loan (Normally 1%)
2. Earning on Deposit (Export Proceeds)
3. Exchange Earning
4. Export Loan /Doc Processing Charges

POST SHIPMENT FINANCE

FAFB (Finance Against Foreign Bill)
Can be on case to case basis or on Limit basis
Single Indent/PerForma Invoice – Part
Shipment
FBP/IBP (Foreign Bill Purchased) (Inland Bill
Purchased)
Document Value: Rs. 100
FAFB 90
Proceeds Rs 100
FAFB Bank Charges Rs. 5/-
At the time of receipt of proceeds from
abroad, bank will adjustment the loan of Rs 90
out of the proceeds i.e. 100. Balance payable
to customer is Rs 10. Out of this, Rs 5 is bank
charges so Rs 5/- (net) will be deposited to
customer (Exporters) a/c

FAFB documents sent in collection

FBP/IBP Documents purchase (Discounting of
Bill of Exchange)
Avoid duplicate financing (Pre-shipment & Post-
shipment financing against same PerForma
Invoice)
Pre-shipment and post-shipment limits can be
simultaneously allowed to same customer (but
obviously against different sets of documents)

NON-FUND FACILITIES
Assurances / Undertaking / Guarantee
PRODUCTS
L/C: Letter of Credit
L/G: Letter of Guarantee

LC – Letter of Credit
It is an authority issued by the Issuing Bank on behalf of
importer in favor of exporter with the undertaking that
the Drafts (Bill of Exchange) drawn there-under will be
duly honored provided the terms and conditions of the
Credit are duly complied with.
Irrevocable / Revocable LC
LC Established (open)
IMPORT EXPORT
1)Importer (Buyer) 3)Exporter (Seller)
2)Issuing Bank 4)Advising Bank
One off Facility OR Regular Limit
500M / Tons Edible Oil Import from Malaysia
@ USD 470 / M.Ton USD 235,000/- (PKR 39.245M)
1USD = PKR167
SECURITY
Cash Margin 10% (0% - 100%) (Rs 3.92million) Margin A/c

Lien on Import Documents

Tangible Property (Mortgage of
Residential/Commercial/Industrial/Agricultural Property)
LC Establishment Vouchering
Contingent Liability Off-Balance Activity/Liability
DR: Customer Liability L/C 39.245 M
CR: Bankers Liability L/C 39.245 M

DR: Customer Deposit A/c 4.03 M

CR: Customer LC Margin A/c 3.92M
CR: Income A/c LC Commission 0.10M
CR: SWIFT Chgs 0.01M
LC Transmission Mechanism
S.W.I.F.T (Society for Worldwide Interbank Financial
Telecommunication)
Example: SWIFT Code of HBL FX Br KHI HABBPKKA007
Banking Channel in LC
1. Advising Bank: LC is communicated to exporter(e.g.
Deutsche Bank Germany)
 2. Negotiating Bank Can be same as Advising Bank or
different Bank
3. Confirming Bank
4. Correspondent Bank
Bankers’ Alamanac
GD stands for Goods Declaration
H. S Code Harmonized Serial Code written as two pairs of
4 digits, separate by a dot (example: 1234.0001)
Unique product indentity

2 sets of export/shipping document sent by exporter

1st set to exporter’s Bank Advising Bank
2nd set to Importer Importer
2nd set of export documents is NON-NEGOTIABLE
Bill of Lading Endorsed in favor of IMPORTER so that
importer may collect consignment from Port
Attorney Holder of the bank is authorized to Endorse B/L
Bank is the Consignee
Importer is the Notifying Party

LC Documents
1. Commercial Invoice
2. Bill of Exchange
3. Insurance Document
4. Transport Document (Bill of Lading)
5. Packing List
6. Certificate of Origin
7. Phytosanitary Certificate
8. Other (quality/inspection) Certificate
LC Documents Lodgement
Sight LC
Dr: PAD (Payment Against Documents)
Dr: Margin on LC
Cr: Nostro A/c (Our A/c with You (Citibank, AMEx)
Contingent Liability Reversal
DR: Bankers Liability L/C 39.245M
CR: Customer Liability L/C 39.245M
D/A L/C Documents Lodgement
LC D/A Contingent Liability Reverse
DR: Bankers Liability L/C
CR: Customer Liability L/C
LC Acceptance Liability Creation
DR: Customer Liability Acceptance
CR: Banker’s Liability Acceptance

Types of LC
Sight LC – Amount payable as soon as the documents are
checked by bank and presented to customer for payment
D/A LC (Documents Against Acceptance)
Also known as Usance LC or Acceptance Credit
Time usage
Time cushion permitted to pay foreign exchange bill
60 Days from B/L Date (B/L Date 31-3-2020) 30-5-2020
Underlying BoE will be called Time Draft

Deferred Payment LC
Payment against LC is due after time as ascertained in LC
Provides payment grace period to importer
Back to Back LC
Exporter, on the strength of LC received (as advised)
establishes an import LC in favor of a third party in order
to meet its export commitment.
Transferable LC
LC endorsed by original exporter in favor of third party
supplier/exporter

USD 250,000 Afroze Textile Mills Karachi (Exporter)

Frankfurt General Hospital Germany (Importer)
USD 50,000/= Consignment + Shipped 6/3/20
Faisalabad Textile Mills – USD 200,000/- LC Transferred
FORECE MAJEURE
Import in Pakistan from Germany
USD 200,000/= CIF Port Qasim Karachi
Incoterm CIF (Cost Insurance & Freight)

Keamari Port Karachi

Port Qasim Karachi
Qawadar Port
 UCP
Uniform Customs and Practice
Related to Trade Finance (Import / Export)

Intl Chamber of Commerce UCP 600

ICC Publication
After 1st World War
Established 1919 by businessmen
1923 –International Court of Arbitration
1933 – UCP-82
1936 – Incoterms (Commercial Terms of Trade e.g. 1)C&F
2)CI&F) USD 250,000 C&F Port Qasim Karachi
1944 – Representation at Bretton Woods Conference
1945 – ICC granted accreditation to Conference on
International Organization (CIO)
1951 – UCP 151
1962 – UCP 222
1974 – UCP 290
1977 – 1st business entity to issue anti-corruption rules
1989 – UCP 400
1994 – UCP 500
2003 – Signatory to UN Global Compact
2007 – UCP 600

CHANGE DRIVERS
Globalization
Technology
Automation
Information Technology
Communication
Mode of Transporation
Innovation
BANK GUARANTEES
Bank Guarantee / Letter of Guarantee (L/G)
A written contract issued by a bank (Guarantor) on
behalf of a customer/applicant (Debtor) in favor of
beneficiary (creditor) whereby the bank undertakes to
pay or discharge the liability of the debtor in case of any
default.

Generally L/Gs are Close-Ended. Specific expiry date of

obligation of guarantor as well as customer/applicant
Continuous / Open Ended Guarantees: Favoring
Customs Deptt, Utility Companies (SNGPL/SSGCL, PTCL,
IESCO etc). Although expiry date is mentioned but
obligation does not end with expiry date
L/G Expiry Date stated. Obligation is of continuous nature
LG Called / Invoked / Encashment
Types of L/Gs
Bid Bond/ L/G 1% or 2% of the contract price
Performance Bond (L/G) 10% of the approved bid
amount e.g. 45M x 10% = PKR 4.5M
Advance Payment Guarantee (Mobilization Guarantee)
Usually in big ticket deals (Large contract value)
Beneficiary urgentcy towards completion of contract
Contractor carries very good reputation for execution of
contracts and utilization of funds
Pseudo RF facility
This is adjusted against billing of contractor
20M APG
40M bills, of Rs. 4M each,to be generated.(10 bills to be
presented)
Out of each bill of Rs 4M, 2M APG amount portion will be
adjusted. This is the adjustment mechanism.

Shipping Guarantee
Consignment arrives at port before arrival of original LC
documents.
0.4% / quarter 1 year LG required. PKR 1M
PKR 4,000/quarter.
Year commission 4,000 x 4 = PKR 16,000
In case of continous/close ended guarantee the
beneficiary will compel the customer to arrange renewal
of L/G before expiry. At the same time bank will also
monitor LG expiry and would ask the customer to either
get it renewed or get it released from beneficiary

2018: Mohsin Ali & Co applied to UBL for PKR 2M Bid

Bond Limit. Mostly Bid Bonds are 1% of the Contract
Value. Therefore
1% of Contract Value = PKR 2M
Contract Value = PKR 2M = PKR 200M
1%
This indicates that customer is interested to Bid for
contract(s) of aggregate value PKR 200M. (1 contract of
PKR 200M OR more than one contract of aggregate
value PKR 200M)

What if all bids get successful??????

Performance Bond/Guarantee Needed Next (10% - 20%)
200 M x 10% = PKR 20M
200 M x 20% = PKR 40M

Bid Bond 2M
Performance Bond 20M
Total Limit PKR 22M

Mohsin Ali & Co 46M

Bid Bond 1% PKR 0.460M
Performance Bond 10% PKR 4.600M
Bid Bond 0.46M will be redeemed/released to customer

Bid Bond
 Issued by banks to their customers who wish to bid
for a contract
 Issued in favor of the party offering the contract i.e.
the beneficiary
  In case of unsuccessful bid, guarantee is returned to
applicant
 In case of successful Bid, Bid Bond is replaced
(usually) by a Performance Bond
 Instrument i.e. Bank Guarantee is also referred to as
Letter of Guarantee (L/G)

Example
Contract Amount PKR 100,000,000
Bid Bond Required 2% of Contract Value
So 2% of PKR 100M PKR 2,000,000
Assuming Cash Margin on Bid Bond 10%
L/G Commission Rate 0.4% / Quarter
Time Period 1 Quarter

Accounting Entries (Bid Bond Issuance)

DR: Customer Liability Bid Bond PKR 2,000,000
CR: Banker’s Liability Bid Bond PKR 2,000,000
DR: Customer A/c PKR 208,000
CR: Cash Margin on Bid Bond PKR 200,000
CR: Income A/c Comm. on Bid Bond PKR 8,000

Accounting Entries – Bid Bond Redemption

DR: Banker’s Liability Bid Bond PKR 2,000,000
CR: Customer Liability Bid Bond PKR 2,000,000
DR: Cash Margin on Bid Bond PKR 200,000
CR: Customer A/C PKR 200,000

Performance Bond
Issued to meet a contractual obligation
Guarantees satisfactory completion of a contract/project

Example
Contract Amount PKR 100,000,000
Performance Bond Required 10% of Contract Value
So 10% of PKR 100M PKR 10,000,000
Assuming
 Cash Margin on Performance Bond 10%
 L/G Commission Rate 0.4% / Quarter
 Time Period 1 Quarter

Accounting Entries (Performance Bond Issuance)

DR: Customer Liability Performance Bond PKR 10,000,000
CR: Banker’s Liability Performance Bond PKR 10,000,000
DR: Customer A/c PKR 1,040,000
CR: Cash Margin on Bid Bond PKR 1,000,000
CR: Income A/c Comm on Bid Bond PKR 40,000
Accounting Entries (Performance Bond Redemption)
DR: Banker’s Liability Performance Bond PKR 10,000,000
CR: Customer Liability Performance Bond PKR 10,000,000
DR: Cash Margin on Performance Bond PKR 1,000,000
CR: Customer A/c PKR 1,000,000

Mobilization Guarantee/Advance Payment Guarantee

It is quite similar to RF Facility
Advance Amount is provided by Beneficiary to Customer
to mobilize assets/resources on project site and
commence the contract activities.

Bid Bond Successful

Performance Bond Successfully Submitted
Bid Bond Release Successful
MG/APG Generally 5% - 25% of contract
amount
Lumpsum 25%. Five tranches of 5% each.
This guarantee will become operative and affective upon
receipt of mobilization advance at our counter.
Mobilization Advance is adjusted on pro-rata basis
against each submitted invoice/bill
Contract 100M
APG 20% of Contract PKR 20M
10 bills/invoice to be submitted of PKR 10M each
Mobilization Advance 10 Tranches
PKR 20 / 10 = PKR 2M will be the amount of Mobilization
Advance that will be adjusted against each invoice/bill
submitted by customer/applicant
Hence Net Proceeds received against each bill by
customer will be PKR 10M – PKR 2M = PKR 8M

SBP Prudential Regulations

Lending in disciplined manner to be conducted and
monitored
Economic Growth (Approx 35% of GDP)
Strengthen International Trade (Import export)
Improve Balance of Trade to reduce Trade Deficit.
Strengthen PKR
Reduction in cost of production & domestic pricing
Bad Loans Curtailed
Level playing field
Competitive and formally structured market
Job Creation
Poverty reduction
Crime Rate reduce
Overall economy positive trajectory
Expand SME Portfolio
Cash flow based lending approach encouraged
Risk mitigation
Resource deployment strategy
R&D and analysis
SME Corp/Commercial Housing
MFB Consumer Agricultural

Risk Operations Corporate Governance

SME Prudential Regulations

SME R-1 to R-9
SE R-1 to SE R-10
ME R-1 to R-6

PRUDENTIAL REGULATIONS FOR SMEs

SME-1 BoD approved Credit Policy. Prog Based Lending. Business Visits

Upto loan size 2M bank can arrange insurance of

collateral/securities of customer
SME-2 E-CIB Report (Fresh, Renewal, Enhancement, Resch/Restructur)

Defaulted customer can be provided loan provided justify

Circumstantial default Intentional/Willful Default

SME-3 P/G – sponsor(ing) Director. Except Exposure on Liquid Securities

SME-4 Clean Facility (only P/G) < = PKR 5M. (Clean Consumer separate)

SME-5 Proper Loan Utilization (ME: Stock Reports, /Current Assets)

SME-6 Restriction on Facilities to Related Parties (SE: undertaking ok)

SME-7 Loan Docs in Urdu

SME-8 Securities / Margin Requirements Loan > 5M secured

Caustic soda LC at 100% Cash Margin

SME-9 SME Oriented R&D, MIS (Delinquencies, Segmentation)

 PRUDENTIAL REGULATIONS FOR SEs

SE-1 SE Definition 50 Employees. PKR 150M Annual Sales

SE-2 Per Party Exposure PKR 25M

SE-3 Audited Accounts (Loan > 15M)

SE-4 Repayment Capacity. CF Based Lending. Cost, Revenue Margin

SE-5 Collateral Valuation (Loan >5M PBA Approved, <=5M: Bank/PBA)

SE-6 Dues Recovery, Fair Debt Collection Policy

SE-7 General Reserve (1% of Performing, Funded, Unsecured Portfolio)

SE-8 Classification of Bad Loans & Provisioning (OAEM,SS,D,L)

Overdue 90 days OAEM 10% of Loan Amount Prov.

180 S.S 25%

 1Yr D 50%

1.5Y Loss 100%

In case of Trade Bill if overdue by 180 days then classified as LOSS

SE-9 Rescheduling / Restructuring (10% paid, 6-months regular pmt)

SE-10 TAT (15 days)

PRUDENTIAL REGULATIONS FOR MEs

ME-1 Definition (HR: 51-100 or 51-250, Sales >150M <= 800M)

ME-2 Repayment Capacity (C.F.Based Lending, Business Drivers, Risk)

ME-3 Per Party Exposure (PKR 200M)

ME-4 Audited Accounts (Ltd. Co OR Exposure > 10M)

ME-5 Classification / Provisioning (R/R, 10%, 6-months, 35% payment)

ME-6 TAT (25 working days)

PRUDENTIAL REGULATIONS - CORP/COMM

R Risk Mgt

G Corp Gov

O Ops

R-1 Per Party Borrowing Power Exposure on Related Party

R-2 Exposure Against Contingent Liabilities 10 x E

R-3 Financial Analysis (Accounts, E-CIB, BBFS)

R-4 Security & Margin (Clean 2M, P/G, Margins)

R-5 Monitoring (Collateral, Pledged Stock Inspection)

R-6 Exposure in Shares/TFCs/Sukuk

R-7 Guarantees

R-8 Classification / Provisioning for Assets

R-9 Assuming Obligations on Behalf of NBFCs

R-10 Payment of Dividend

USD 4,595.55
USD 4.595,55
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