Regulations for Consumer Financing

PRUDENTIAL GUIDELINES FOR CONSUMER FINANCING AND SMALL ENTERPRISE FINANCING. REF: BRPD CIRCULAR NO. 10 DATED 20.08.2005.

PRUDENTIAL REGULATIONS FOR

CONSUMER FINANCING

FIRST EDITION – 2004

BANGLADESH BANK

 

FOCUS GROUP TEAM

 

Name Institution Designation Phone  
Md Jahangir

Alam

Bangladesh Bank Deputy General Manager 7125844 Co-ordinator
Imran Rahman BRAC Bank Deputy Managing

Director

9862050 Member
Osman Ershad

Faiz

Standard Chartered

Bank

Chief Operating Officer 9563906 Member
Md Yunus Ali

 

Nasim Ahmed

Janata Bank

 

Prime Bank Ltd.

Deputy General Manager

 

Senior Vice President

9558703

 

9567265

Member

 

Member

Md. Afzalul Bashar Janata Bank Asst. General Manager 9558703 Member

TABLE OF CONTENTS

PART – I   DEFINITIONS……………………………………………………………………….. 6

MINIMUM REQUIREMENTS FOR CONSUMER FINANCING………………………. 7

PART – II   PRUDENTIAL REGULATIONS……………………………………………… 10

REGULATION – 1………………………………………………………………………………… 10

REGULATION – 2………………………………………………………………………………… 10

REGULATION – 3………………………………………………………………………………… 10

REGULATION – 4………………………………………………………………………………… 11

REGULATION – 5………………………………………………………………………………… 11

REGULATION – 6………………………………………………………………………………… 12

REGULATION – 7………………………………………………………………………………… 12

REGULATIONS FOR CREDIT CARDS…………………………………………………… 13

REGULATION – 8………………………………………………………………………………… 13

REGULATION – 9………………………………………………………………………………… 13

REGULATION – 10…………………………………………………………………………………………………………… 13

REGULATION – 11…………………………………………………………………………………………………………… 13

REGULATION – 12…………………………………………………………………………………………………………… 13

REGULATION -13………………………………………………………………………………… 13

REGULATIONS FOR AUTO LOANS……………………………………………………… 15

REGULATION – 14…………………………………………………………………………………………………………… 15

REGULATION – 15…………………………………………………………………………………………………………… 15

REGULATION – 16…………………………………………………………………………………………………………… 15

REGULATION – 17…………………………………………………………………………………………………………… 15

REGULATION – 18…………………………………………………………………………………………………………… 15

REGULATION – 19…………………………………………………………………………………………………………… 15

REGULATION – 20…………………………………………………………………………………………………………… 16

REGULATION – 21…………………………………………………………………………………………………………… 16

REGULATION – 22…………………………………………………………………………………………………………… 16

REGULATIONS FOR HOUSE FINANCE…………………………………………………. 17

REGULATION – 23…………………………………………………………………………………………………………… 17

REGULATION – 24…………………………………………………………………………………………………………… 17

REGULATION – 25…………………………………………………………………………………………………………… 17

REGULATION – 26…………………………………………………………………………………………………………… 17

REGULATION – 27…………………………………………………………………………………………………………… 17

REGULATION – 28…………………………………………………………………………………………………………… 17

REGULATION – 29…………………………………………………………………………………………………………… 17

REGULATIONS FOR PERSONAL LOANS INCLUDING LOANS FOR THE PURCHASE OF CONSUMER DURABLES……………………………………………………………………… 18

REGULATION – 30…………………………………………………………………………………………………………… 18

REGULATION – 31…………………………………………………………………………………………………………… 18

REGULATION – 32…………………………………………………………………………………………………………… 18

PART- III     DEVELOPMENT GUIDELINES……………………………………………… 19

  1. POLICY GUIDELINES……………………………………………………………………. 21
  1. PROCEDURAL GUIDELINES………………………………………………………….. 25
  1. PREFERRED ORGANIZATIONAL STRUCTURE &

RESPONSIBILITIES…………………………………………………………………………….. 38

  • Preferred Organizational Structure………………………………………………… 38
  • Key Responsibilities…………………………………………………………………….. 38

APPENDIX – I………………………………………………………………………………………. 39

APPENDIX – II…………………………………………………………………………………………………………………… 40

APPENDIX – III…………………………………………………………………………………….. 41

APPENDIX – IV………………………………………………………………………………………………………………….. 42

APPENDIX – V……………………………………………………………………………………… 43

APPENDIX – VI………………………………………………………………….. 44

APPENDIX – VII……………………………………………………………………………………. 45

APPENDIX – VIII…………………………………………………………………………………… 46

APPENDIX – IX……………………………………………………………………………………. 47

APPENDIX – X…………………………………………………………………………………………………………………… 48

APPENDIX – XI………………………………………………………………………………………………………………….. 49

APPENDIX – XII…………………………………………………………………………………… 50

APPENDIX – XIII………………………………………………………………………………….. 52

APPENDIX – XIV……………………………………………………………………………………………………………….. 53

APPENDIX – XV…………………………………………………………………………………………………………………………………………………………………………… 54

APPENDIX XVI – Product Program Guideline – Auto Loan……………………………… 55

APPENDIX XVII – Product Program Guideline – Consumer Durable Loans..58 APPENDIX XVIII – Product Program Guideline – Loans for Professionals…………………………. 61

APPENDIX XIX – Product Program Guideline – Unsecured Personal

Loans………………………………………………………………………………………………… 64

APPENDIX XX – Product Program Guideline – Credit Card……………………… 67

APPENDIX XXI – Classification & Provisioning Guidelines…………………….. 70

DEFINITIONS

  1. ‘Bank’ means a banking company as defined in Banking Companies Act,
  2. ‘Borrower’  means   an   individual   to   whom   a   bank   has   allowed   any consumer financing during the course of
  3. ‘Consumer financing’ means any financing allowed to individuals for meeting   their   personal,   family   or   household                              The   facilities categorized as Consumer Financing are given as under:
    • Credit Cards forms of clean lending with a maximum limit of 500,000/ – to a single borrower. Supplementary credit cards shall be considered part of the principal  borrower  for  this purpose. The limits exceeding Tk. 500,000/ – shall be secured  appropriately  by  the  banks.  Corporate  Card will not fall under this category and shall be regulated by exiting guideline/regulations for lending.

For  Charge  Cards,  pre-set  spending  limits  generated by the standardized

systems, as in the global practice, shall be allowed.

  • Auto Loans (Secured by way of hypothecation /charge on vehicle)
  • Housing Finance (secured by mortgage on the    e.g. house/flat/land)
  • Personal loans for the payment of goods service and
  1. ‘Documents‘ include vouchers, cheques, bills, pay -order, promissory notes, and securities for leases/advances and claims  by  or  against  the bank or other papers supporting entries in the books of a
  2. ‘Liquid Securities’ means securities readily convertible into cash without recourse  to  a  court  of    ‘Liquid  Securities  for  the  purpose  of  these regulations  shall  mean  realizable  value  of  bank  deposits,  certificate  of deposits,   certificate   of   investments,   Government   securities,   shares  of listed  companies  on  the  active  list  of  stock  exchanger,  ICB  units  and certificates of mutual funds. These securities should be in possession of the banks with perfected lien.
  3. Equity means Capital & Reserves as defined in section 13 of Banking Companies Act

MINIMUM REQUIREMENTS FOR CONSUMER FINANCING.

Apart from the specific regulations given under each mode  of  financing  separately, general requirements laid down here should also be followed by the banks while undertaking consumer financing. It may by noted that these are the minimum requirements and should not in any way be construed to restrict the role of the management processes through establishing comprehensive credit risk management systems appropriate to their type, scope, sophisticat ion and scale of operations. The Board of Directors of the banks are required to establish policies, procedures  and practices to define risks, stipulate responsibilities, specify security requirements, design internal controls and then ensure strict compliance with them.

Pre -Operation:

Before embarking upon or undertaking consumer financing, the banks shall implement/follow the guidelines given below. The banks already involved in the consumer financing will ensure compliance with these guidelines within six month of the date of issuance of Consumer Financing Prudential Regulations.

  1. Banks shall establish separate Risk Management capacity for the purpose of consumer financing, which will be suitably staffed by personnel having sufficient expertise and experience in the field of consumer finance/business.
  2. The banks shall  prepare  comprehensive  consumer  credit  policy  duly  approved by the Board of Directors, which shall interalia cover loan administration, including documentation, disbursement and  appropriate  monitoring The policy shall explicitly specify the functions, responsibilities and various staff positions, powers/authority relating to approval/sanction of consumer finance facility.
  3. For every type of consumer finance activity, the bank shall  develop a specific Product                    Program     Guide     (PPG).     The      program     shall     include     the objective/quantitative   parameters   for   the   eligibility   of   the   borrower   and determining  the  maximum  permissible  limit  per    The  PPG  will  also indicate  the  maximum  permissible  exposure  banks  will  take  against  each product.
  4. Bank shall  put  in  place  and  efficient  computer  based  MIS  for  the  purpose  of

consumer finance, which should be able to effectively cater to the needs of consumer financing portfolio and should  be  flexible  enough  to  generate necessary information reports used by the management for effective monitoring

of  the  bank’s  exposure  in  the  area.  The  MIS  is  expected  to  generate  the following periodical reports:

  • Delinquency reports (for 30, 60, 90 180 & 360 days and above) on monthly
  • Reports interrelating  delinquencies  with  various  type  of  customers  of various attributes of the customers to enable the management to take important policy  decisions  and  make  appropriate  modifications  in  the lending
  • Quarterly product wise profit and loss account duly adjusted with the provision on account of classified These  profit  and  loss statements should be placed before the Board of Director in the immediate next Board Meeting. The branches of foreign banks in order to comply with these conditions shall place the reports before a committee comprising of Managing Director, Chief Finance Officer and Head of Consumer Banking.
  1. The banks shall develop comprehensive recovery procedures for the delinquent consumer The recovery procedures may vary from product to product. However, distinct and objective triggers should be prescribed for taking pre- planned enforcement/recovery measures.
  2. The institutions starting consumer financing are encouraged to `impart sufficient training on an ongoing basis to their capability regarding the various aspects of consumer
  3. The banks shall prepare standardized set of  borrowing  and  recourse documents (duly cleared by their legal counsels) for each type of consumer

Operation s:

  1. Consumer financing, like other credit facilities, must be subject to the Bank’s risk management process setup for this particular The process may include, identifying source of repayment and assessing customer’  ability  to repay his/her past dealings with the bank, the net worth and  information obtained from a Credit Information Bureau approved by Bangladesh Bank.

  1. At the time of  granting facility under  various modes  of consumer  financing, banks shall obtain a written declaration from the borrower divulging details of various facilities already obtained from other The banks should carefully study the details given in the statement and allow fresh finance/limit only after ensuring that the total exposure in relation to the  repayment capacity of the customer does not exceed the reasonable limits as laid down in the approved policies of the banks. The declaration will also help banks to avoid exposure against a person  having  multiple  facilities  from  different institutions on the strength of an individual source of repayment.
  2. Internal audit and control function of the bank, apart from other things, should be designed and strengthened so that it can efficiently undertake an objective review of the consumer finance portfolio from time to assess various risks and possible The internal audit should also assess the adequacy of the internal control and ensure that the required policies and standards are developed and practiced. Internal audit should also comment  on  the  steps taken by the management to rectify the weaknesses pointed out by them in their previous reports for reducing the level of risk.
  3. The banks shall ensure that their accounting and computer systems are well equipped to avoid charging of mark -up. For this purpose it should be ensured that the mark-up charged on the outstanding amount is kept separate from the
  4. The banks shall ensure that any repayment made by the borrower is accounted for before applying mark-up on the outstanding

Disclosure/Ethics:

The banks must clearly disclose all the important terms & conditions. Fees, charges and penalties, which  are  internal  including  interest  rate,  pre-payment penalties and the conditions under which that apply. For ease of reference and guidance of their customers, banks are encouraged to publish brochures regarding frequently asked questions.

PART – II

PRUDENTIAL REGULATIONS

REGULATION – 1

FACILITIES TO RELATED PERSONS

The   customer   finance   facilities   extended   by   banks   to   their   directors,   major shareholders,  employees  and  family  members  of  these  persons  shall  be  at  arms length basis and on normal terms and conditions applicable for other customers of the banks. The Banks shall ensure that the appraisal standards are not compromised in such cases and market rates are used for these persons.

REGULATION – 2

LIMIT ON BANKS EXPOSURE AGAINST TOTAL CONSUMER FINANCING.

Banks shall ensure that the aggregate exposure under all consumers  financing facilities at the end of first year and second year of  the start of their consumer financing does not exceed 2 times and 4 times of their equity respectively. For subsequent  years,  following  limits  are  placed  on  the  total  consumer  financing facilities:

* Method of classification for the above purpose shall be in accordance with the classification requirement as prescribed under Prudential Regulation no.4 (Annexure XXI).

REGULATION – 3

TOTAL FINANCING FIACILITIES TO BE COMMENSURATE WITH THE INCOME

While extending financing facilities to their customer, the banks would ensure that the total installment of the loans extended by the financial institutions is commensurate with the take home income/disposable income and repayment capacity of the borrower. This measure would be in addition to banks’ usual evaluations of  each proposal concerning credit worthiness of the borrowers,  that  the  banks’  portfolio under consumer finance fulfills the prudential norms and instructions  issued  by  the Central Bank and does not impair the soundness and safety of the bank itself.

REGULATION – 4

CLASSIFICATION AND PROVISIONING FOR ASSETS

  1. Banks shall observe the prudential guidelines given at Appendix  XXI  in  the matter of classification  of  their  Consumer  Finance  portfolio  (irrespective  of  all consumer banking products) and provisioning there-against.
  2. In addition to the time-based criteria prescribed in Appendix XXI, subjective evaluation of performing and non-performing credit portfolio shall be made for risk assessment and, where considered necessary, any account including the performing account will be clas sified, and the category of classification determined on the basis of time based criteria shall be further Such evaluation shall be carried out on the basis of credit worthiness of the borrower, its cash flow, operation of the account, adequacy of the security, inclusive of its realizable value and documentation covering the advances.
  3. Apart from specific provisioning requirement as prescribed above, banks shall maintain a general reserve at least equivalent to 3% of their consumer  finance portfolio to protect them from the risks associated with the economic cyclical nature of this

SUBMISSION OF RETURNS:

  1. Banks shall submit the borrower-wise annual statements regarding classified loans/ advances to the Banking Inspection

TIMING OF CREATING PROVISIONS:

  1. Banks shall  review,  at  least  on  a  quarterly  basis,  the  collectibility  of  their loans  /  advances  portfolio  and  shall  properly  document         the  evaluations  so   Shortfall in provisioning, if any, determined, as a  result of quarterly assessment shall be provided   for immediately in their books of accounts by the banks on quarterly basis.

REGULATION – 5

RESCHEDULING OF LOAN

Rescheduling  of  loan  will  be  governed  by  rules  &  regulations  as  prescribed  by Bangladesh Bank from time to time.

REGULATION – 6

TRANSFER FACILITIES FROM ONE CATEGORY TO ANOTHER TO AVOID CLASSIFICATION

The bank shall not transfer any loan or facility to be classified from one category of consumer finance to another to avoid classification.

REGULATION –7

CREDIT INFORMATION BUREAU (CIB) CLEARANCE

While considering  proposals  for  any  exposure,  banks  should  give  due  weightage  to the credit report relating to the borrower and his group obtained from a Credit Information Bureau (CIB) of Bangladesh Bank. The condition of obtaining CIB report will be governed by rules & regulations as prescribed by Bangladesh Bank from time to time.

REGULATIONS FOR CREDIT CARDS

REGULATION – 8

The banks should take reasonable steps to satisfy themselves that cardholders have received the card, whether personally  or  by  mail.  The  banks  should  advise cardholders of the need to take reasonable steps to keep the card safe and the PIN secret so that frauds are avoided.

REGULATION – 9

Banks shall provide the credit card holders with the statements of account at monthly intervals, unless there has been no transaction of any outstanding  balance  on  the account since last statement.

REGULATION – 10

Banks shall be liable for  all  transactions  not  authorized  by  the credit card holders after they have been properly served with a notice that the card has been lost/stolen. However, the bank’s liability shall be limited to those amounts wrongly charged to the credit card holder’s account. In order to mitigate the risks in this respect, the banks are encouraged to  take  insurance  cover  against  wrongly  charged  amounts,  frauds, etc.

REGULATION – 11

In case the cardholders make partial payment, the banks should take into account the partial payment before charging service fee/mark-up  amount  on  the outstanding/billed amount so that the possibility of charging excess amount of mark- up could be avoided.

REGULATION – 12

Due date for payment must be specifically mentioned on the accounts statement. If fine/penalty is agreed to be charged in case the payment is not made by the due date, a clear mention of the same should be given in the agreement.

REGULATION -13

Maximum unsecured limit under credit card to a borrower (supplementary cards shall be considered part of the principal borrower)  shall  not  exceed  Tk.  500,000/ -. The banks may allow financing under the credit card scheme in excess of the limit of Tk.

500,000/ -, provided the excess amount is  secured  appropriately.  However,  in  no case the limit will be allowed to exceed Tk. 2 million.

In case of foreign currency cards, cards can be issued subject to repayment is made against respective foreign currency account or against lien of foreign currency quota allocated to Bangladeshi nationals by Bangladesh Bank from time to time.

REGULATIONS FOR AUTO LOANS

REGULATION – 14

The vehicles to be utilized for commercial purposes shall not be covered under the Prudential Regulation for consumer finance. Any  such  financing  shall  ensure compliance with existing regulations covering lending.  These  regulations  shall  only apply for financing vehicles for personal use.

REGULATION – 15

The maximum tenure of the auto loan finance shall not exceed five-year.

REGULATION – 16

The banks shall not allow auto loan (including insurance) exceeding TK. 5 million per individual under this head. For the purpose of this regulation, auto facility to the dependent members of an individual shall also be treated as part of the exposure of that individual.

While allowing auto loans, the banks shall ensure that the minimum down payment does not fall below 10% of the value of vehicle.

REGULATION – 17

In  addition  to  any  other  security  arrangement  on  the  discretion  of  the  banks,  the vehicles financed by the banks shall be properly secured by way of hypothecation.

REGULATION – 18

The banks shall ensure that the vehicle remains properly insured (comprehensive) at all times during the tenure of the loan.

REGULATION – 19

The clause of repossession in case of default should  be  clearly  stated  in  the  loan agreem ent. At least 15 days before enforcing repossession, banks shall send a legal notice to the borrower through courier service of registered mail against proper acknowledgment. The repossession expenses charged to  the  borrower  shall  not  be more than actual incurred by the bank. However,  the  maximum  amount  of repossession charges  shall  be  listed  in  the  schedule  of  charges  provided  to customer. The banks shall develop an appropriate procedure for repossession of the vehicles and shall ensure that procedure is strictly in accordance with law.

REGULATION – 20

A detailed repayment schedule should be provided to  the  borrower  at  the  outset. Where alterations become imminent because of late payment or prepayment and the installment amount or period changes significantly, the revised schedule should be provided to the borrower at earliest  convenience  of  the  bank  but  not  later  than  15 days of the change. Further even in case of insignificant changes, upon the request of the customer, the bank shall provide him revised repayment schedule free of cost.

REGULATION – 21

The banks desirous of financing the purchase of used cars shall prepare uniform guidelines for determining value of the used vehicles. However, in no case the bank shall finance the cars older than five year.

REGULATION – 22

The banks should ensure that a good number of authorized auto dealers are placed at their panel to eliminate the caches of collusion of other unethical practices.

REGULATIONS FOR HOUSE FINANCE

REGULATION – 23

The maximum per party limit in respect of housing finance by the banks will be Tk 7.5 million.

The  housing  finance  facility  shall  be  provided  at  a  maximum  debt  equity  ratio  of 80:20.

REGULATION – 24

Commercial  banks  shall  ensure  that  at  no  time  their  total  exposure  under  house financing exceeds 10% of their net consumer advances.

REGULATION – 25

Banks  are  free  to  extend  mortgage  loans  for  housing,  for  a  period  not  exceeding twenty year. Banks should be mindful of adequate asset liability matching.

REGULATION – 26

The house  financed  by  the  banks  shall  be  mortgaged  in  bank’s  favour  by  way  of registered mortgage with registered Power of Attorney.

REGULATION – 27

Banks shall either engage professional staff or arrange sufficient training for their concerned officials evaluate the property, assess the genuineness and integrity of the title documents, etc.

REGULATION – 28

The bank’s management should put in place a mechanism to monitor conditions in the real estate market (or other product market) to ensure that its policies are aligned to current market conditions.

REGULATION – 29

Banks must develop floating rate products for extending housing finance, thereby managing interest rate risk to avoid its adverse effects. Banks also must develop in- house system to stress test their housing portfolio against  adverse  movements  in interest rates as also maturity mismatches.

REGULATIONS FOR PERSONAL LOANS INCLUDING LOANS FOR THE PURCHASE OF CONSUMER DURABLES

REGULATION – 30

Limits per person for such loans will be Tk.3 lac with out any securities. However, banks may lend higher amounts provided the loans are secured appropriately. But, in no case, the loan amount will be allowed to  exceed  Tk.10  lac.  The  loan  secured against liquid securities shall however, be exempt from this limit.

REGULATION – 31

In cases, where the loan has been extended to purchase some durable goods/item, the same will be hypothecated with the bank besides other securities, which the bank may require on its own.

REGULATION – 32

The maximum tenure of the loan shall not exceed 5 year.