Regulation and Financial Market – Quiz No.

1 – Fall 2018 – IBA, Karachi – BS (A&F)

Part A- MCQs

1. What do we mean by secured financing facility?

a. Lending to borrower with conditions attached
b. Funds extended with complete documentation
c. Funds extended to the individuals who are on Active Taxpayers List (ATPL)
d. Exposure backed by collaterals

2. Medium Enterprise can avail financing (including leased assets) up to Rs 200 million from all banks/DFIs:
a. False
b. True

3. The banks/DFIs shall maintain a general reserve against SE financing, to protect them from the risks associated with the economic cyclical nature of
this business:
a. True
b. False

4. What do we mean by classified loans?

a. Loans provided to priority sectors
b. Loans that are categorized by degree of risk
c. Loans that are overdue
d. Loans to Directors

5. Banks/DFIs are required to obtain copy of audited accounts in case of lending to the small enterprises for exposure up to Rs 15 million:
a. False
b. True

6. For minimizing turnaround time in case of SE Finance:

a. Banks/DFIs shall not take more than 30 days for the credit approval process
b. Only pre-approval requirements shall be advised in one go
c. The facility shall be disbursed before the security documentation is completed
d. None of the above

7. While considering any credit proposal banks and DFIs shall obtain:
a. Annual audited accounts
b. e-CIB
c. Collateral
d. All of the above

8. The rescheduling/ restructuring of non-performing loans shall not change the status of classification of a loan/ advance etc. unless:
a. The terms and conditions of rescheduling/ restructuring are fully met for a period of at least one year (excluding grace period, if any) from
the date of such rescheduling/ restructuring and at least 10% of the outstanding amount is recovered in cash.
b. At least 35% of the total restructured loan amount (principal + mark-up), either at the time of restructuring agreement or later-on any time
before the completion of one-year period as above mentioned in option A.
c. Only A is correct
d. Both A and B are correct.

9. Banks/DFIs may take total clean exposure on an SME borrower up to:

a. Rs 2,500,000 in aggregate from all banks/DFIs
b. Rs 5,000,000 in aggregate from all banks/DFIs
c. Rs 1,500,000 in aggregate from all banks/DFIs
d. None of the above

10. When the exposure net of liquid assets to ME does not exceed the limit of Rs 10 million; Banks shall obtain a copy of financial statements duly
audited by practicing Chartered Accountant:
a. True
b. False

Part B- Short Answer Question

Q.1 Define the terms: 1) Margin Requirement; 2) Per Party Exposure Limit; and 3) Classified Loan?
Ans: Margin requirement: Financial institutions maintain margins on collateral / securities provided by the borrower. Usually, after applying margin, the worth
of collateral is more than the financing facility (or principal outstanding) provided by the Banks/DFIs.
Per party Exposure limit: A financing limit that is defined under Prudential Regulations for each borrower from a single bank or from all banks / DFIs.
Classified Loan: A loan that is overdue either principal or mark-up.

Q.2 By establishing SME Banking Oriented Research & Development (R&D) divisions / units, how banks and DFIs benefit from it?
Ans: Through research the banks / DFIs can do financing to those SME sectors where funds are badly needed. Banks can better structure their products and
services, keeping in view the dynamics of SME businesses. Lastly, through R&D, banks / DFIs can also reduce their classified loans (or improve their SMEs
portfolio).
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 Q.3 Why central bank emphasizes on SME financing?

Ans: SME sector is significantly contributing in the national economy. But the SME financing as a percentage of total loans from banking sector is quite low
compared to its contribution (and compared to other developing countries, such as Iran, Bangladesh, India, Turkey etc.). Hence there is a strong need for
financial institutions to expand their outreach towards this important sector. That is the reason the SBP wants banks to focus on this neglected sector.
Part C – Numerical
M/s. AK & Sons (SME borrower – Sweets & Bakers) obtained short term-loan from Al Baraka Bank for Working Capital Requirement in January 2013. The
owner defaulted on loan (principal + mark-up) due on June 30, 2014. The bank’s outstanding exposure at the time of default was Rs. 3.8 million. M/s AK Sons
pledged stock with the bank amounting to Rs. 15 million (FSV of Rs. 12 million). If you are credit officer in the SME Department and your manager asks you to
provide complete schedule of classification and provisioning? The number of personnel working in the borrower’s factory and shop was 7 with annual sales
turnover of PKR 120 million.

OAEM 90 days or more Provision of 10% of the difference – Outstanding principal less collateral
Substandard 180 days or more Provision of 25%
Doubtful 1 year or more Provision of 50%
Loss 18 month or more Provision of 100%
Pledged Stock – 40% for first, second, and third year – FSV benefit allowed from the date of classification.

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