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:
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.