The Securities and Exchange Commission of Pakistan (SECP) has directed the Non-Banking Micro Finance Companies (NBMFCs), having a gross loan portfolio of Rs. 500 million or more, to follow guidelines on risk management that provide a minimum benchmark of best practices.
SECP issued an S.R.O. 1605 (I)/2021 on Tuesday to amend Non-Banking Finance Companies and Notified Entities Regulations, 2008.
According to SECP, an NBFC will formulate and implement a comprehensive funding and liquidity management policy duly approved by its board to ensure that it has funding from well-diversified sources for its sustainability and for meeting social and performance objectives.
According to the regulations, an NBMFC will devise and implement a comprehensive risk management framework duly approved by its board to identify, assess, and prioritize risks, develop strategies to measure risk, design operational policies and procedures to mitigate risk, implement and assign responsibilities, test effectiveness, evaluate results and revise policies and procedures, where required.
NBFCs will ensure that the risk management framework comprehensively covers all risks, including credit, operational, and market risks, to which the company is exposed and encompasses the scope of risks to be managed, determine risk tolerance limits and have the flexibility to accommodate any change in business activities.
NBFCs will design risk management tools and approaches that respond to their specific clients, lending methodologies, operating environments, and financial and social performance objectives and develop contingency plans duly approved by its board to effectively deal with stressful situations.
An NBMFC will ensure that its funding sources are well-diversified including equity, sponsor/donor funding, subordinated loans, commercial finance, debt instruments issued through capital markets, and other sources; (b) its funding mix has a good balance of the short term, medium-term and longterm funds in line with the overall funding policy; (c) its borrowings including subordinated debt from a single source as a percentage of total assets is not more than the specified limits.
An NBMFC board will establish and oversee a loan underwriting policy aligned with its risk governance framework, its risk tolerances and limits, and its overall risk appetite and strategy, and the policy shall be reviewed by the board periodically.
The board will seek periodical reporting from the company’s oversight functions to properly monitor and evaluate the effectiveness of lending policies and procedures, risks, and to ensure that individual transactions comply with the underwriting policy and the risk tolerances.
An NBMC will have written manuals and policies with regard to the screening, approval, monitoring, and collection of loans. The manuals and policies will be devised taking into account the special characteristics of its lending methodology.
In addition to compliance with regulation 9, an NBMFC will:
- Develop comprehensive Know Your Customer and Customer Due Diligence policies duly approved by the board and shall be communicated down the line to relevant staff. The policy shall define high-risk factors which may include the description of customers, products, transaction channels and geographic distribution;
- Deploy systems, controls and take all reasonable measures to identify existing and prospective customers and to gain a reasonable assurance that the customer is not exploiting microfinance channel for any unlawful activity;
- Develop and implement Anti Money Laundering /Counter Financing of Terrorism policies and procedures in line with SECP’s regulations, directions, and guidelines and ensure meticulous compliance of the same;
- Perform due diligence to evaluate borrowers’ willingness and repayment capacity to adequately service their debt obligations, including consideration of credit history and performance on past and existing obligations;
- Develop income assessment and evaluation procedures of borrowers that are relevant to the nature of borrowers’ business to ensure that the income is reasonably estimated and the total installment of the credit extended by it commensurate with monthly income and repayment capacity of the borrower;
- Appropriately value the inconsistent incomes and, if necessary, suitably discount it;
- Assign due weightage to the Credit Information Bureau report in addition to their approved criteria while undertaking credit appraisal of the prospective borrower. The CIB report should not be the sole assessment tool used to determine reliability as it indicates past, not future behavior, or the borrower’s current financial condition;
- Establish minimum requirements of information and analysis upon which lending decisions are made and shall ensure that the documents, data, or information collected under customer due diligence process are kept up-to-date to ensure traceability of the borrowers;
- In the case of secured lending, set forth procedures for collateral evaluation and lien perfection documents;
- Develop an internal mechanism to monitor the overall exposure of their borrowers to manage credit risk and minimize the risk of borrowers’ overindebtedness. At the time of granting the loan, it shall obtain a written declaration on the prescribed format from the borrower disclosing details of various facilities already obtained from other microfinance banks, microfinance institutions, banks, and other financial institutions and shall ensure that total exposure of their clients does not exceed their total repayment capacity as determined under the criteria laid out in the credit policy.
According to SECP, an NBMFC will have a clear policy for large loan sizes, as may be determined by its board, and will deploy more stringent criteria, duly approved by its board, to establish an appropriate valuation methodology and require sufficient documentation to support the collateral valuation, where applicable.