Credit Operations in Pakistan
Credit Operations in Pakistan
1. an accommodation or facility provided on the basis of participation in profit and loss, markup or markdown in price,
hire purchase, equity support, lease, rent sharing, licensing charge or fee of any kind, purchase and sale of any
property including commodities, patents, designs, trade marks and copyrights, bills of exchange, promissory notes or
other instruments with or without buyback arrangement by a seller, participation term certificate, musharika,
morabaha, musawama, istisnah or modaraba certificate, term finance certificate;
2. facility of credit or charge cards;
3. facility of guarantees, indemnities, letters of credit or any other financial engagement which a financial institution
may give, issue or undertake on behalf of a customer, with a corresponding obligation by the customer to the
financial institution;
4. a loan, advance, cash credit, overdraft, packing credit, a bill discounted and purchased or any other financial
accommodation provided by a financial institution to a customer;
5. a benami loan or facility that is, a loan or facility the real beneficiary or recipient whereof is a person other than the
person in whose name the loan or facility is advanced or granted;
6. any amount due from a customer to a financial institution under a decree passed by a civil court or an award given
by an arbitrator;
7. any amount due from a customer to a financial institution which is the subject matter of any pending suit, appeal or
revision before any court;
8. any amount of loan or facility availed by a person from a financial institution outside Pakistan who is for the time
being resident in Pakistan.
9. any other facility availed by a customer from a financial institution.
Financial Institutions Recovery of Finances Ordinance 2001 (FIRO)
“Obligation” includes
(i) any agreement for the repayment or extension of time in repayment of a finance or for its
restructuring or renewal or for payment or extension of time in payment of any other
amounts relating to a finance or liquidated damages; and
(ii) any and all representations, warranties and covenants made by or on behalf of the
customer to a financial institution at any stage, including representations, warranties and
covenants with regard to the ownership, mortgage, pledge, hypothecation or assignment of,
or other charge on, assets or properties or repayment of a finance or payment of any other
amounts relating to a finance or performance of an undertaking or fulfillment of a promise;
and
Duty of a customer.(1) It shall be the duty of a customer to fulfil his obligations to the
financial institution.
FINANCIAL INSTITUTION
Financial institution” means and includes (AS PER FIRO 2001)
• (i) any company whether incorporated within or outside Pakistan which
transacts the business of banking or any associated or ancillary business in
Pakistan through its branches within or outside Pakistan and includes a
government savings bank, but excludes the State Bank of Pakistan;
• (ii) a modaraba or modaraba management company, leasing company,
investment bank, venture capital company, financing company, unit trust or
mutual fund of any kind and credit or investment institution, corporation or
company; and
• (iii) any company authorized by law to carry on any similar business, as the
Federal Government may by notification in the official Gazette, specify.
COMMERCIAL Electronic Money
BANKS DIGITAL FULL Institutions (EMI)-
BANKS Naya pay, Finja
etc)
2.NON
BANKING
FINANCIAL White Label ATMs
Credit (Non-Banking entities
INSTITUTIONS Bureaus to act as Digital
banking for cash
deposit & withdrawal)
TYPES OF BANKING SECTORS
SALE PRICE
BANK CUSTOMER
BUYS BACK GOODS
DEFERRED PAYMENT PURCHASE PRICE (IN LUMP SUM OR INSTALMENT)
PRIMARY
IMMOVEABLE MOVEABLE
SECURITY
Guarantee
&
Indemnity
CHARGE HYPOTHEC
MORTGAGE PLEDGE
SEC 100 ATION
A TYPICAL FINANCE CYCLE
Finance
Repayment
application
Finance
Finance appraisal
disbursement
Finance
decision
Courtship/ Relationship Exploring 1. Call Report
2. Exposure calculation
3. Finance/ Loan Structure initial evaluation
4. Security Structure evaluation
Credit Investigation 1. Borrower’s Profile
2. Personal Net Worth
3. Integrity
4. Management Profile
5. Industry Dynamics
6. Business to be Financed
7. Market Position
8. Relationship with other Banks/Financial Institutions
9. Security Checks/Valuation
10.
11.
12.
Purpose of Financing
Repayment
Know your Customer
TAPESTRY
Proposal & Appraisal 1. Credit History (Character)
OF CREDIT
2. Ability to Repay and Management Ability (Capacity)
3. Solvability (Capital)
4. Economic Environment (Condition)
5. What And How Much security to be taken (Collateral)
• Strong cash flow support for smooth debt service supported • Justification for Finance
by financial analysis
• Compliance with Regulatory as well as bank’s policy • Covenants
framework:
DOCUMENTATION
CONVENTIONAL ISLAMIC
Encumbrance
Encumbrance Creation
Recording
Standard Charge
Limited Company
Documents
• To ensure that exposure limits with respect to Per Party Exposure and Per Group Exposure to
Commercial/Corporate clients is not breached.
• To check whether Credit Information Bureau is to be obtained or not (through calculating exposure
minus liquid security).
• To determine the optimum amount of exposure in each industry
• To ensure compliance with the Regulations relating to the exposure limits, it is imperative that the term
is understood correctly so that it can be calculated correctly.
GROUP & CONTROL
• Group means persons, whether natural or juridical, if one of them or his dependent family
members or its subsidiary, have control or hold substantial ownership interest (as defined in
Prudential Regulations) over the other.
• Subsidiary will have the same meaning as defined in section 3 of the Companies Ordinance,
1984* i.e. a company or a body corporate shall deemed to be a subsidiary of another company if
that other company or body corporate directly or indirectly controls, beneficially owns or holds
more than 50% of its voting securities or otherwise has power to elect and appoint more than
50% of its directors.
• *(Section 2 (1) (68) of Companies Act 2017 (layers of subsidiaries are also subsidiary)
• Control refers to an ownership directly or indirectly through subsidiaries, of more than one half of
voting power of an enterprise.
• Substantial ownership/affiliation means beneficial shareholding of more than 25% by a person
and/or by his dependent family members, which will include his/her spouse, dependent lineal
ascendants and descendants and dependent brothers and sisters. However, shareholding in or by
the Government owned entities and financial institutions will not constitute substantial
ownership/affiliation, for the purpose of these regulations.
ASSOCIATED COMPANY
Companies Act 2017
30-06-2015 20 20 25 25
TERF/ ITERF for plant and machinery would attract weightage of 25% for the purpose of calculation of
Single / Group Obligor Exposure Limit (BPRD Circular Letter No. 41 of 2020)
EQUITY OF THE BANK/DFI
Includes
• paid-up capital in respect of ordinary shares,
• general reserves,
• balance in share premium account,
• reserve for issue of bonus shares,
• statutory reserves,
• retained earnings/accumulated losses as disclosed in latest annual audited financial statements.
•For the purpose of Regulation R-1, reserve shall also include revaluation reserves on
account of fixed assets to the extent of 50% of their value. However, for this purpose
assets must be prudently valued by valuators on the panel of Pakistan Banks Association
(PBA), fully taking into account the possibility of price fluctuations and forced sale
value.
•Revaluation reserves reflecting the difference between the book value and the market
value will be eligible up to 50%.
LARGE EXPOSURE
Large Exposure means an exposure of 10% or more of a bank’s/DFI’s
equity to a single obligor or a group.
• The aggregate amount of large exposures of a bank/DFI shall not, at
any point in time, exceed 50% of its total gross advances and
investments (excluding investment in government securities and
loans secured against GOP guarantees).
• Large exposure limits shall not be applicable to investment in
government securities and loans secured against GOP guarantees
• Different concentration limits may be assigned to different
banks/DFIs by SBP based on their supervisory assessment
EXPOSURE IN SHARES AND
TFCs/SUKUK
• Banks / DFIs shall not own shares of any single company in excess of
5% of their own equity.
• This limit will also be applicable to units of all types of mutual funds
and REITs
• Banks/DFIs will obtain prior approval from the State Bank for
purchasing shares of a company exceeding, in aggregate, 10% of the
capital of Investee Company or 5% of their paid-up capital, whichever
is lower.
EXPOSURE IN SHARE IN EXCESS OF REGULATORY LIMIT
10% of the capital of Investee Company or 5% of their paid-up capital, whichever is lower
• Properly assess the credit need of the borrower based on their financial analysis and
genuine credit requirements.
• Give due weightage to the credit report (eCIB from SBP) relating to the borrower
and its group. CIB report is not older than two months at the time of approval of
credit limits.
• For exposure on defaulters, they should strictly follow their risk management
policies and credit approval criteria and properly record reasons and justifications in
the approval form.
• Required to obtain Borrower’s Basic Fact Sheet (BBFS). However, if the Loan
Application Form already contains all the information as required in BBFS, then no
separate BBFS may be required
REGULATION R-4
SECURITY AND MARGIN REQUIREMENTS
• Secured means exposure backed by liquid assets, pledge stock, mortgage of
land, plant, building, machinery or any other fixed assets, hypothecation of stock
(inventory), trust receipt, assignment of receivable, lease rentals, and contact
receivables but does not include hypothecation of household goods. The
unsecured exposure will be considered as clean.
• Financing facilities granted without securities including those granted against
personal guarantees shall be deemed as ‘clean’ for the purpose of this regulation.
• A bank’s exposure against the security of Trust Receipt only may be treated as
secured exposure
• Banks/DFIs are free to determine the margin requirements on facilities provided
by them to their clients taking into account the risk profile of the borrower(s)
CLEAN EXPOSURE
• For Corporate & Commercial Finance: All exposures shall be adequately secured. However,
banks/DFIs, in aggregate, may provide clean financing facility in any form up to Rs 2,000,000/- (Rupees
two million only) to any single obligor. Financing facilities granted without securities including those
granted against personal guarantees shall be deemed as ‘clean’ for the purpose of this regulation. Further,
at the time of granting a clean facility, banks/DFIs shall obtain a written declaration to the effect that the
borrower, has not availed of such facilities from other banks/DFIs so as to exceed the prescribed limit of
Rs 2,000,000/- in aggregate.
• Banks/DFIs shall ensure that the aggregate exposure against all their clean facilities shall not, at any
point in time, exceed the amount of their equity as disclosed in their latest audited financial statements
• For Agricultural Finance clean finance limit is Rs 5,000,000/
• For SME Finance, the clean finance limit is Rs 5,000,000/
• For Consumer Finance: Banks/DFIs may take total clean exposure on a customer under Credit Card and
Personal loan/financing up to Rs 2,000,000 in aggregate from all banks/DFIs. Further, banks/DFIs shall
also ensure that overall credit card and personal loan/financing limits, both on secured as well as on
unsecured basis, availed by one person from all banks/DFIs in aggregate should not exceed Rs
5,000,000, at any point in time.
EXEMPTIONS TO PER PARTY CLEAN EXPOSURE LIMIT
Facilities provided to finance the export of commodities eligible under Export Finance
Scheme backed by LCs.
Financing covered by the guarantee of Pakistan Export Finance Guarantee Agency up to
the amount of guarantee.
Loans/ advances given to the employees of the banks/ DFIs in accordance with their
entitlement / staff loan policy.
Investment in COIs / interbank placements with NBFCs, provided the investee NBFC is
at least rated ‘A’ for long-term rating and ‘A2’ for short-term rating or equivalent by a
recognized rating agency.
Investment of banks/DFIs in subordinated and unsecured TFCs, issued by other
banks/DFIs to raise Tier-II Capital as per State Bank of Pakistan’s instructions.
Banks/DFIs will be free to decide about obtaining security/collateral against the L/C
facilities for the interim period, i.e. from the date of opening of L/C till the receipt of title
documents to the goods.
REQUIREMENT OF PERSONAL GUARANTEE
• All the banks/DFIs financing any particular customer against pledge of stocks of below mentioned
commodities shall conduct joint inspection of the pledged stocks at least once in a quarter, where aggregate
exposure against such stocks equals or exceeds the amount shown against each commodity
Sr. No. Commodity Aggregate Committed Exposure
(limits)
• Banks/ DFIs can issue guarantees on behalf of Pakistani firms and companies
against the back to back/counter-guarantees of banks/DFI, and/or counter-
guarantee of bank/DFI situated in a foreign country is also acceptable, subject
to a Board approved policy having internal limits for acceptance of such
counter guarantees, subject to Credit rating and limit monitoring of issuing
banks.
• The guarantees shall be for a specific amount and expiry date and shall contain
claim lodgment date. However, banks/DFIs are allowed to issue open-ended
guarantees without clearance from State Bank of Pakistan provided banks/DFIs
have secured their interest by adequate collateral or other arrangements
acceptable to the bank/DFI for issuance of such guarantees in favor of
Government departments, corporations/autonomous bodies owned/controlled
by the Government and guarantees required by the courts
INFRASTRUCTURE PROJECT FINANCING (IPF)
• Asset Securitization means a process whereby any Special Purpose Vehicle raises funds through the
issue of Term Finance Certificates or any other instruments with the approval of Securities and
Exchange Commission of Pakistan (SECP). The funds so received are used to make payment to the
Originator, for acquiring from the Originator the title, property or right in the receivables or other
assets in the form of actionable claims.
• Infrastructure Project Financing (IPF) means either limited recourse or non-recourse financing for
an Infrastructure Project as mentioned in table below, which includes both fund-based and non fund-
based facilities. Projects being financed under modes of financing other than project finance shall not
be governed under Prudential Regulations for IPF . Transport, power, Energy Telecommunication,
water & Telecommunication, Social Cultural & Commercial Infrastructure.
SECURITY
• In order to promote Infrastructure Project Financing, banks/DFIs are encouraged to accept a
‘Concession Agreement/License’ issued by a Government Agency as collateral, as part of the overall
collateral arrangements,
• Primary Security/Collateral: First charge on all the receivables and Project Account(s), Project
Collection Account, Debt Payment Account, Bank Accounts, including offshore accounts maintained
by the Project Company.
INFRASTRUCTURE PROJECT FINANCING (IPF)
SECONDARY SECURITIES/COLLATERAL
• First Charge over all the immovable and movable assets of the project company and
that of the contractors if deemed necessary by the lender;
• First assignment of all insurance policies to cover major and minor risks, including
force-majeure (if applicable);
• First pledge of sponsors’ share in the company, besides ensuring that sponsor’s holding
does not fall below 51% of equity capital without prior approval of the lender(s);
• First assignment by way of security of all government approvals and agreements, the
implementation agreement and the government undertaking;
• First assignment by way of security of the company’s rights under project agreements,
such as project funds agreements, retention account agreement, shareholders
agreement, supply agreement and off-take agreement, EPC and O&M contracts where
applicable.
• First charge/assignment of corporate/bank guarantees furnished by the contractors to
the project company for claiming liquidated damages.
• Any other security as deemed appropriate by the bank/DFI for financing.
DOCUMENTATION
ENCUMBRANCE CREATION &
RECORDING
MOVEABLE PROPERTIES
IMMOVEABLE PROPERTIES
WHAT IS “DOCUMENTATION”
• Customer related Account Opening Documents.
• Pre-Sanction Documents.
• Post Sanction Documents.
• FOREX related Documents.
• Monitoring Documents.
• SWAP Documents.
• Rescheduling/Restructuring Documents.
POST SANCTION DOCUMENTATION
• Why Documents are sought
• Evidence in negotiation
• Use in litigation
• Types of Legal Documents
• Documents having effects in criminal litigation
• Documents having effects in Civil Litigation
• Charge Creation
• Moveable Assets
• Immoveable Assets
• Recording of Charge /Lien Marking.
• Moveable Assets
• Immoveable Assets
MODES OF ENCUMBRANCES
• INTANGIBLE PROPERTY
• Lien
• Assignment
• Hypothecation (for STA)
• TANGIBLE PROPERTY
• MOVEABLE PROPERTY
• Pledge,
• Hypothecation
• IMMOVEABLE PROPERTY
• Mortgage
• Charge as per section 100 TPA….(Passbook)
• Assignment
MOVEABLE PROPERTY (as per STA)
• As per Section 2 sub section 29 of STA, ”movable property” means any
tangible or intangible property other than immovable property, including but
not limited to receivables; rights under letters of credit; rights under trust
receipts; securities (including Government securities) other than book-entry
securities; right to funds credited in a deposit account; title documents;
negotiable instruments; intellectual property, including patents, trademarks,
copyrights, trade-names, goodwill, royalties; stock in trade; inventory; interest
in partnership and other form of entity; ornaments; jewelery; stones; goods-in-
transit; agricultural produce; leaves; grass, including growing grass; petroleum
or minerals that have been extracted; motor vehicles and property attached to
immovable property as defined in clause xxxviii of this sub-section;
• Collateral means “moveable property” whether located inside or outside
Pakistan, that is subject to a security interest.
IMMOVEABLE PROPERTY
• Section 3 of TPA 1882 “attached to the earth” means-
(a) rooted in the earth, as in the case of trees and shrubs;
(b) imbedded in the earth, as in the case of walls or buildings; or
(c) attached to what is so imbedded for the permanent beneficial enjoyment of that to
which it is attached:
• “immoveable property” includes land, buildings, benefits to arise out of land and things
attached to the earth, or permanently fastened to anything attached to the earth, hereditary
allowances, rights to ways, lights, ferries and fisheries but does not include (a) standing
timber, growing crops or grass whether immediate severance thereof it intended or not; (b)
fruit upon and juice in trees whether in existence or to grow in future; and (c) machinery
embedded in or attached to the earth, when dealt with apart from the land (section 2 sub
section 6 of Registration Act 1908)
• "Immovable property" shall include land, benefits to arise out of land, and things attached
to the earth, or permanently fastened to anything attached to the earth. (section 3 of
General Clauses Act 1897)
IMMOVEABLE PROPERTY (as per STA 2016)
• “immovable property” shall include land, benefits to arise out of land, and
things attached to the earth, or permanently fastened to anything attached to
the earth, and shall, notwithstanding anything inconsistent therewith
contained in the General Clauses Act, 1897 (X of 1897), Transfer of Property
Act, 1882 (IV of 1882), Registration Act 1908, (XVI of 1908) and any other
law for the time being in force, exclude property attached to immovable
property as defined in clause (xxxviii) of this sub-section; (STA section 2
sub section 25)
• Section 2 sub section (38) of STA 2016; ”property attached to immovable
property” means the following property irrespective of whether it is attached
to the earth or permanently fastened to anything attached to the earth:
– (a) plant, equipment or machinery;
– (b) fixtures and fittings;
– (c) cables or pipelines embedded in the earth or otherwise; and
– (d) any other item of property as may be notified by the Federal Government for the
purposes of this Act notwithstanding anything inconsistent therewith contained in the
General Clauses Act, 1897 (X of 1897), Transfer of Property Act, 1882 (IV of 1882),
Registration Act, 1908 (XVI of 1908) and any other law for the time being in force;
LAWS OF ENCUMBRANCES-MOVEABLE PROPERTY
MOVEABLE
PROPERTY
CHARGE ON
MORTGAGE ASSIGNMENT
PASSBOOK
CREATION &
CREATION REGISTRATION SAME AS
REGISTRATION
MORTGAG
E
Agreement REGISTRAR ENDORSEMENT IN
(TRANSFER OF REGISTRATION ACT LIEN MARKING Passbook (Pass
PROPERTY ACT 1908 Book Act 1973)
CONCERNED
PROPERTY RECORD
SECP (COMPANIES
ACT)
ENCUMBRANCE
ON MOVEABLE
PROPERTY
• Contract Act 1872
• Financial Institutions Secured Transaction Act 2016 (STA)
HYPOTHECATION
• “Hypothecation” means a charge created by a customer, on all or any
present or after-acquired movable property, in favour of a secured
creditor without delivery of possession of the movable property to such
secured creditor; (Section 2 sub-section 24 of STA 2016)
• The civil law recognizes two kinds of pledge, viz., the “pignus” (pawn)
in which the possession of the thing is actually delivered to the person
for whose benefit the pledge was made and ‘hypotheca”
(hypothecation) in which the possession of the thing pledged remained
with the debtor, the resting in mere contract without delivery.
PLEDGE
• “The bailment of goods as security for payment of a debt or
performance of a promise is called pledge”. (section 172).
• “A bailment is the delivery of goods by one person to another for
some purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed off according to the
direction of the person delivering them” (Section 148).
PLEDGE AS PER STA 2016
• “Pledge” shall have the same meaning as is assigned to it under section 172 of the
Contract Act, 1872 (lX of 1872) and excludes, a security interest, in a negotiable
instrument or a security interest in collateral covered by a title document. (section 2
sub section 33)
• “Proceeds” means identifiable or traceable movable property derived from
collateral including (a) movable property acquired, directly or indirectly, upon the
sale, lease, Licence, exchange, or any other mode of alienation of collateral; (b)
natural fruits of the collateral, including harvested produce where the collateral is
crops or wool, meat or offspring where the collateral is livestock; (c) any and all
amounts, revenues and receivables paid or payable under or in connection with the
collateral; (d) rights arising out of the collateral, including a right to an insurance
payment or any other payment as indemnity or compensation for loss of, or damage
to the collateral, and (e) proceeds of proceeds;
POSSESSION
AS PER SECURED TRANSACTION ACT
• Corporeal Possession: Objects which have physical or materialistic manifestation, and which our
senses can perceive are corporeal possession. Thus, it is the persistent exercise of a claim on the use
of material or tangible objects. For Example House, car, cycle, pen, etc.
• Incorporeal Possession: Objects which don’t have any physical or materialistic manifestation, and
which our senses cannot perceive are incorporeal objects. Thus, it is the persistent exercise of a claim
on the use of immaterial or intangible objects. For example Trademark, goodwill, patent, copyright,
etc.
• Mediate possession of an object is the possession of a thing through a mediator (middleman) like an
agent, friend or servant. It is also called indirect possession.
• Direct Possession: When the possessor himself possesses the property or thing, we call it immediate
possession or direct possession. For example: when I buy a pen from a shop and keep it for myself.
The pen is in the immediate possession of mine.
• Constructive Possession is the authority over an object without having actual possession or charge
of that material. In other words, constructive possession is not actually a possession, but it is a
possession in law and not possession in fact. For example, the delivery of key of car. Here driver
was the constructive possessor of car until he delivers the key.
TYPES OF POSSESSION
• Adverse possession means the possession of some property or object, without legal title, for a
certain time period, sufficient to become acknowledged legal owner. Sometimes, we also
define it informally as “squatter’s rights”. In actual adverse possession of some property, the
possessor is required to prove an intention to keep it absolutely for oneself. Just claiming the
property or paying liabilities for it, without actually possessing it, is not sufficient. For example
Continuous use of private land or driveway or agricultural field of an unused piece of land.
• De facto (in fact) possession means the possession which exists in reality even if it is not
legally recognized.
• De jure possessions are legally recognized possessions regardless of whether it exists in
reality or not. De jure is a Latin word meaning “in law”, lawful, legitimate or a matter of law.
It is also known as juridical possession meaning possession in the eyes of law. De jure
possession is a type of constructive possession. This means that even if a person is not in actual
control or physical contact with the property, they have the legal authority to deal with it as per
their will. For instance, a tenant may be legally occupying an apartment, but the landlord has
constructive possession over it.
PLEDGE DOCUMENTATION-GOLD
• Agreement to Finance
• Personal Guarantee
• Letter of Pledge
• Schroffs/ Goldsmith Assessment
• Delivery and sealing the bag in presence of Customer
• Undertaking of Genuineness
• Indemnification
PLEDGE DOCUMENTATION-STOCKS
• IB-12
• IB-6/7
• (IB-24/22/23) In case of collateral
• IB-29(not used for Agri Credit)
• IB-26
• No liability/charge certificate
• Letter of Disclaimer.
• Letter of request from borrower to take delivery
• Letter of entrustment from bank to Muccaddum.
• Godown Certificate from Muccaddum.
• Delivery receipt Report by Muccaddum.
• Stock Report.
• Delivery Order.
TYPES OF SHORTAGE
Decrease in quantity
• Due to Fire
• Due to natural calamity.
• Due to theft/burglary
• Due to forced lifting of the customer
• Due to mischievous lifting of stocks by the customer in connivance with
Muccaddum.
• Due to irregular/improper/delayed issuance or Non-Issuance of Delivery
Order by the bank.
• Due to Improper calculation of DP.
TYPES OF SHORTAGE
Decrease in quality
• Due to Moisture/pests or other instant force majure problems
• Mal-handling/careless control of stocks which may contain thousands of instances
like Cotton bales needs moisture at certain degree a little bit of carelessness may
create havoc.
• Mal-handling/careless control of stocks with malafide intentions.
• Natural Calamity eg; rain, heat etc
• Stock being older than 180 days in violation of FIFO not observed.
• Subjective rating/grading of stocks by auditor.
FLOATING, FIXED & PARI PASSU CHARGE
• Floating Charge means a charge created by a customer, on all present and after-acquired
movable property or a certain class of present and after-acquired movable property
(including receivables or inventory), in favour of a secured creditor and pursuant to
which the customer is free to deal with the movable property in the ordinary course of its
business until the crystallization, in terms of the security agreement, of such charge into
a fixed charge; (Section 2 sub-section 21 of STA 2016)
• Fixed charge is a charge on a definite property which can be ascertained and the
company cannot dispose of the property without the consent of the charge holder.
However the company is allowed to use it for business purpose. Generally fixed charge
is created on fixed assets such as plant and machinery.
• Pari-passu charge shall be considered on proportionate basis of outstanding amount
(PR- ANNEX VI) Under this, the charge is shared by more than one lender in the ratio of
their outstanding amount. The prior consent of the existing charge holder(s) is required
by the company
FIRST, EXCLUSIVE, RANKING, FURTHER CHARGE
• First Charge: A legal right under which the Creditor has the right to decide on what to do
with a property if the borrower fails to maintain the repayments
• Second Charge: Where a second loan is backed by the same assets on which a first charge
already exists, the subsequent charge holder is called "second charge". This comes into
effect once the holder of the first charge has sold the assets and received their dues. The
second charge holder is entitled to receive the residual value of assets once the first charge
holder has been satisfied.
• Ranking Charge: If no priority is given to charge, the charge as per “priority in time” is
called ranking charge
• Exclusive charge – The security under the exclusive charge is provided to a particular
lender only.
• Further charge – With the consent of the first charge holder, the particular assets on
which charge is already created may be provided to other lenders as second charge. In case
of liquidation of assets, the first charge holder has the right to recover his dues and the
balance is recovered by the second charge holder followed by others
RECEIVABLES & SECURITY AGREEMENT
• “Receivables” means a contractual or non-contractual right to receive money,
whether such right is existing, future, accruing, conditional or contingent and
includes rents; profits; dues; a money award by an arbitrator; monies payable as
salaries of employees; dividends; tolls, user-fees or any sum, by whatever name
called; monies payable under decrees; monies payable under guarantees;
actionable claims and all kinds of actual or contingent monetary obligations;
and excludes a right to payment of funds credited in a deposit account and right
to payment under a negotiable instrument; (Section 2 sub-section 39 of STA
2016)
• ”Security agreement” means an agreement, instrument or any other document
in writing that creates or provides for a security interest in favour of a secured
creditor;
SECURITY INTEREST & TITLE DOCUMENT
• “Security interest” means a right, title, encumbrance or interest of any kind upon
movable property created or provided for by a security agreement in relation to a
transaction that in substance secures the payment or performance of a customer’s
obligation under a finance without regard to the form of the transaction or the
terminology used by the parties or the identity of the person who has title to the movable
property, and includes any charge, mortgage, hypothecation, fixed charge, floating charge,
assignment, lien, pledge, assignment of receivables by way of security and transactions
under which a secured creditor retains title such as a finance lease, hire purchase
agreement, sale and lease back arrangement, conditional sale agreement and retention of
title arrangement, having similar effect; (Section 2 sub-section 48 of STA 2016)
• “Title document” means a document in writing evidencing title to goods which is, by
law or custom, negotiable, and includes a bill of lading, dock warrant, warehouse receipt,
railway receipt, airway bill, truck receipts or similar record issued by a person in the
business of transporting or storing goods; (Section 2 sub-section 51 of STA 2016)
EFFECTIVENESS OF A SECURITY INTEREST
(Section 5 of STA 2016)
• The secured creditor and the customer shall enter into a security
agreement in terms of sub-section (2) for all security interests other
than security interests created pursuant to sections 11 and 12.
• (2) A security agreement shall state,---
– (a) the name and address of the secured creditor and customer;
– (b) the obligations secured by the security interest;
– (c) a description of the collateral in a manner that reasonably allows its
identification; and
– (d) the date of its execution.
PERFECTION OF SECURITIES
A security interest may be perfected,---
(a) in the case of a pledge created by a company, by possession of the collateral by the secured creditor;
(b) in the case of a pledge created by an entity, by registration as provided under this Act; or
(c) in the case of any other security interest, by registration as provided under this Act.
• (2) Notwithstanding sub-section (1) and subject to sub-section (3),---
(a) a security interest in a right to payment of funds credited in a deposit account may be perfected only by
control;
(b) a security interest in collateral covered by a title document may be perfected only by possession of the title
document by the secured creditor; and
(c) a security interest in a negotiable instrument may be perfected only by possession of the negotiable instrument
by the secured creditor.
• Explanation.—Perfection of security interests under clauses (a), (b) and (c) shall not require registration as
provided under this Act.
• (3) Sub-section (2) shall not be applicable where a security interest in a right to payment of funds credited in a
deposit account or a security interest in collateral covered by title document or a security interest in a negotiable
instrument is—
(a) created as part of a hypothecation or floating charge that may otherwise be perfected by registration under
clause (c) of sub-section (1); or
(b) in the nature of proceeds of collateral that is otherwise perfected in accordance with section 15.
SPECIAL PRIORITY RULES AS PER STA 2016
(SECTION 42 TO 49)
At any time after a secured creditor decides to enforce a pledge after an occurrence of an event of default- the
secured creditor may give a written notice of demand to the customer in writing and require the customer to satisfy
his obligation within fourteen days from the date of receipt of the notice. The notice shall give details of the amount
payable by the customer and specify, the collateral that may be enforced in the event ofthe customer failing to
satisry his obligation:
Provided that the secured creditor may dispense with such notice if in the reasonable opinion of the secured creditor,
the collateral is in danger of being wasted, misappropriated or is perishable; or the amount of finance exceeds ten
million rupees and the security agreement provides for such dispensation.
PERSONAL GUARANTEE
• By virtue of personal guarantee the borrower or other person
giving guarantee for the repayment of “purchase price” binds
himself personally to adjust the bank finance in case of default.
• The person furnishing personal guarantee shall be taken as
wearing the same shoe as that of borrower.
LEGAL POSITION OF PERSONAL
GUARANTEE
• The said person shall be treated as “customer”, meaning
thereby the claim/suit shall be filed at the same time against
him and the borrower. The general perception that the guarantor
shall be contacted after the recovery efforts from borrower have
failed, does not carry any legal standing after promulgation of
Financial Institution (Recovery of Finances) Ordinance 2001.
• Section 2 (c) of The Financial Institution (Recovery of
Finances) Ordinance 2001 defines customer as “a person to
whom finance has been extended by a financial institution and
includes a person on whose behalf a guarantee or letter of credit
has been issued by a financial institution as well as A SURETY
OR AN INDEMNIFIER”
PROPERTY OF THE PERSONAL GUARANTOR
• Section 16 of the Financial Institution (Recovery of Finances) Ordinance 2001 deals with the
issue.
• “Attachment before judgment, injunction and appointment of Receivers.- (1)
Where the suit filed by a financial institution is for the recovery of any amount through the
sale of any property which is mortgaged, pledged, hypothecated, assigned, or otherwise
charged or which is the subject of any obligation in favor of the financial institution as
security for finance or for or in relation to a finance lease, the Banking Court may, on
application by the financial institution, with a view to preventing such property from being
transferred, alienated, encumbered, wasted or otherwise dealt with in a manner which is likely
to impair or prejudice the security in favor of the financial institution, or otherwise in the
interest of justice
• (a) restrain the customer and any other concerned person from transferring, alienating,
parting with possession or otherwise encumbering, charging, disposing or dealing with the
property in any manner;
• (b) Attach such property;
• (c) Transfer possession of such property to the financial institution; or
• (d) Appoint one or more Receivers of such property on such terms and conditions as it may
deem fit. “
DP note why Redundant Now?
(For Commercial Banks)
• Contract never dies.
• Limitation?
• History of Banking Recovery Jurisdictions
• Civil Court Speedy Trials of Negotiatble Instruments.
• Banking Tribunal Act 1979
• Banking Tribunal Act 1984
• Banking Recovery Act 1997
• FIO 2001
IMMOVEABLE PROPERTIES
WHAT DOES LAND RECORD
MEAN?
GENERAL TYPES OF DOCUMENTS FOR LAND USE
• The Registered deed of absolute ownership; • Pass book;
Registered deed of allotment rights; • Fard (abstract from register Haqdaran),
• Registered deed of leasehold rights; • Girdawri (document narrating possession of
• Allotment letter/transfer letter of perpetual land)
proprietary rights; • Mutation
• • Notification/letter from Government for the
Allotment letter/transfer letter of lease hold
allotment/grant/lease of specific land;
rights;
• Certificate from Government regarding sale of
• Lease deed/s; Mutation (intiqaal); government land
PTD/PTO; • PT-1 (a property tax record narrating the record
• Bay-nama (Sale Deed); of an urban property).
• Hiba-naama (Gift Deed); • The transfer of allotment rights is often
• Tabadla-nama (Exchange Deed); registered with sub-registrars hence creating
• another optional document of title alongwith
Tuqseem-nama (Demarcation Deed);
allotment/transfer letter.
• Dastbardari-nama (Relinquishment Deed); • The transfer of leasehold rights are often
• Conveyance Deed (transfer of rights by the registered with sub-registrars hence creating
competent authority say court); another optional document of title alongwith the
lease deed.
GENERAL TYPES OF LAND MANAGEMENT RIGHTS IN
PAKISTAN
• Allotment rights by a development authority, • Holding of agricultural land by virtue of
• Allotment rights by a cooperative society, mutation alone, Holding of agricultural land
• Allotment rights by Federal/Provincial through tenancy,
Government, • Absolute ownership of urban land through a
• Allotment rights by Housing Limited deed registered under Transfer of Property Act
companies, (TPA) to be recorded in property tax department,
• Lease hold rights by army housing schemes, • Absolute ownership of rights (with land and
without roof) in a multistory building through a
• Leasehold rights by army controlled schemes
deed registered under Transfer of Property Act
under category,
(TPA) to be recorded in property tax department,
• Long Leasehold rights by private individuals,
• Absolute ownership of space rights (without
• Ordinary leasehold rights for possession (rent land and roof) in a multistory building through a
based holdings), deed registered under Transfer of Property Act
• Rights acquired through Grant of land by (TPA) to be recorded in property tax department,
Federal/provincial governments, • Holding by way of trust,
• Absolute ownership of agricultural land through • State Land,
a deed registered under Transfer of Property Act
• Holding of Army Controlled land with the high
(TPA),
security area.
• Holding of agricultural land by virtue of pass
book and mutation (in revenue record only),
DOCUMENTS & LAND RECORD SYSTEMS IN
PAKISTAN
5 QS IN EVERY PROPERTY
• What is the type of right?
• Which department shall have record of specific property?
• How these departments handle these properties?
• Who approves maps?
• Address of property tells the type of property?
What is the type of right?
Free Hold/ Possessory
TYPES OF LAND HOLDING THAT CAN BE
MORTGAGED
1. Absolute Ownership (Free Hold)
1. Freehold of Urban Land
2. Freehold of Urbanized Land
3. Freehold of Agricultural Land
2. Possession rights
I. Allotment Rights by Statutory Bodies
(authorities/coop societies registered
under the relevant act). (exclusive) READ THE FIRST DOCUMENT TO DETERMINE THE RIGHT
OWNERSHIP STRUCTURE OF
PAKISTAN
Colonies
How these departments handle these
properties?
Land holding Pattern & Town Planning
State
TREE OF LAND RIGHTS IN
PAKISTAN
Provincial
Federal Lands Armed Forces
Governments
Lease (Management
Land Rights Development Institutions through Cantt
Boards
Grant of of Lease
Grant of to Grant of Ownership
Lease of Agri land Shamilat/ Asaesh/
Ownership Rights to Development Allotment/Lease Lease/Allot Building Control
to individuals Development Authority Colonization
to Individuals
Authorities
Sale/Transfer of
Ownership
Who approves maps?
Development Authorities/ Local Government/
Cantonment
Military
Local
Development Estate Office/
Government/ Private house at
Agricultural land Authority Cantonment
TMO
converted into residential Board
Military/Defence forces
(in addition to Aks Shajra Private Housing scheme
owned Area under
that demarcates the into Metropolitan area
Cantonments
boundaries and maps
approves designs within
approved boundaries)
House 41, Khayaban e Mujahid. DHA Phase 5, Lease (In Sindh). Land Held by Cantonment and DHA
House 5, Block 9, Clifton. Karachi Clifton is Cantonment Board Area Lease Cantt Board
Plot 48, SITE Area. Karachi Industrial Estate Allotment Industrial Estates operated through SBCA
House No 48, Steel Town Cooperative Housing Cooperative Housing Society Allotment See the map for ambit of Development Authority/
Survey No 12, Deh Mithun, Mirpur Khas. Wherever word Deh, Survey, Goth will be used in Sindh Freehold See the map for ambit of Development Authority/
Revenue
House No 73, Moon Road, Civil Lines, Larkana Word of “Civil Line” shows it is a “Colony” owned by Lease Larkana does not have metropolitan area and
Provincial Government through Land Revenue development authority hence local government
Khasra No 55, Khewat 5, Mauza Thull, Dera Allah Words of “Khasra Number”, “Khewat”, “Khatoni”, Free hold See the map for ambit of Development Authority/
House Number 5, Airport Road. Multan Cantt. Word of cant means Lease Lease Cantt
99-BB, Phase 4, DHA. Lahore Except for in Sindh, All Development Authorities Allot in Allotment DHA
MODES OF CONVEYANCE
MODES OF TRANSFER
1. Sale
2. Exchange
3. Gift
4. Relinquishment
5. Inheritance
6. Will
7. Conveyance
I. Court Decrees
II. Grant through Allotment
III. Lease
IV. Allotment
SALE
• As per Section 54 of Transfer of Property Act 1882, “Sale” is a transfer of ownership in
exchange for a price paid or promised or part paid and part promised. Such transfer, in the
case of tangible immovable property of the value of one hundred rupees and upwards, or in
the case of a reversion or other intangible thing, can be made only by a registered instrument.
• In the case of tangible immovable property, of a value less than one hundred rupees, such
transfer may be made either by a registered instrument or by delivery of the property.
Delivery of tangible immovable property takes place when the seller places the buyer, or such
person as he directs in possession of the property.
• A contract for the sale of immovable property is a contract that a sale of such property shall
take place on terms settled between the parties. It does not, of itself, create any interest in or
charge on such property.
EXCHANGE
• As per Section 118 of Transfer of Property Act 1882, when two
persons mutually transfer the ownership of one thing for the
ownership of another, neither thing or both things being money
only, the transaction is called an “exchange”. A transfer of
property in completion of an exchange can be made only in
manner provided for the transfer of such property by sale.
SOME RULES ABOUT GIFT
• A gift of a property can be made in favor of a natural person (human being) or a
legal person, such as a company, trust etc.
• A gift can be made to any person out of love and affection i.e. daughter, teacher etc.
• A gift can be made to any person in return for his/her services rendered to the donee
i.e. a servant.
• A gift can be made to a daughter to equalize her share in inheritance.
• During lifetime, One can gift all my property or a part of it. One can make a gift of
the whole of that property of which he/she is the sole owner. However, one can
make a gift of his/her share if the property is jointly owned.
• A gift made during Marz-ul-Maut cannot take effect beyond 1/3 of a donee's estate,
after payment of funeral expenses and debts, unless the legal heirs of the deceased
endorse such a gift after the donor's death. A gift made in favour of an heir during
Marz-ul-Maut cannot take effect unless other legal heirs endorse such a gift after
the donor's death.
INHERITANCE & SUCCESSION
• Inheritance is the process of the heir inheriting his ancestors'
Property. Succession governs how the inheritance would take place.
• Upon death of any family member, legal heirs languish in courts for
years before they are able to obtain Letters of Administration (for
immovable properties) and Succession Certificates (for movable
properties).
• Succession Certificate & Letter of Administration can be sought
from NADRA instead of Civil Court. (certain areas in Pakistan)
• https://succession.nadra.gov.pk/
NADRA OR COURT?
• Letter of Administration & Succession Certificate Act 2019
was introduced initially for Islamabad territory and gradually
to be applied in different areas of Pakistan (section 1)
• NADRA can decline to process application in case of
“factual controversy” (dispute or claim) and the case will be
filed with Civil Court as per Succession Act 1925 (Section 5-
b)
Deceased
SHARER
RESIDUARY
DISTANT KINDRED
SHIA LAW
Deceased
SHARER
RESIDUARY
DECEASED
DISTANT
QURANIC SHARERS RESIDUARY
KINDRED
HUSBAND DESCENDANTS
WIFE ¼, 1/8
½,1/4 DESCENDANTS ASCENDANTS
SONS
SONS OF DECEASED OF DECEASED
SONS, DAUGHTERS OF SON
DAUGHTER OF SON
Daughter`s
ASCENDANTS Children & False Grand
Father/mother
MOTHER 1/6, True
descendants
Children`s
FATHER 1/6 Father
1/3 Grandfather daughters & Descendants
descendants of parents
Descendants (daughter/mot
PATERNAL PATERNAL GRAND
Full
of father her side)
GRANDFATHER 1/6 MOTHER 1/6 Consanguine Sons and sons of full
Brother/ Brothers & & Consanguine
SIsters Sister Brother
FULL SISTER CONSANGUINE
Descendants of
2/3 SISTER ½, 2/3 Paternal Grand
father
UTERINE BROTHER UTERINE Full Sons of full & SUNNI
1/6, 2/3 paternal Cong paternal Consanguine
SISTER 1/6, 2/3 paternal uncles LAW
uncles Uncles
DECEASED
Watch-listing
Timely action Timely action
Suit filing
Decree
Resulting Resulting
Recovery Recovery
Write-off/Waiver Write-off/Waiver
(if any) (if any)
CLASSIFICATION
R-8
• Banks/DFIs shall observe the prudential guidelines given at Annexure-V in the matter
of classification of their asset portfolio and provisioning there-against on time based
criteria.
• 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 classified, and the category of classification determined on
the basis of time based criteria shall be further downgraded.
• Such evaluation shall be carried out on the basis of
– credit worthiness of the borrower,
– its cash flow, operation in the account,
– adequacy of the security, inclusive of its realizable value and
– documentation covering the advances.
Classification Determinant Income Treatment Provisions to be made
Substandard 90 days overdue To be kept in Provision of 25%
Principal or Mark up Memorandum account Less
unless realized in cash Liquid assets
Benefit off mortgage/
properties/ pledge etc
2 Issuance of demand • Issuance of notice with 14-14-30 days for the repayment of liability determined
notices to the by CA firm.
customer
3 Evaluation of the • Three valuers are to be hired within 7 days of the expiry of the 30 days’ notice.
property Rule 3 (b) (i)
• After 15 days of appointment, the valuers shall independently evaluate the
value of the mortgaged property and determine its forced sale price. Rule 3 (b)
(ii)
4 Publication in • a publication in one reputable English and Urdu newspaper in the province in
newspaper which the mortgaged property is situated
• above information must be sent to the mortgagor and other mortgagees and all
interested parties through a notice. Section 15 (c)
Steps Heading Details
The auction • commence after 15 days of the newspaper publication of the notice
• The Highest bidder is required to deposit 25% of the bid amount, within 2 business
days and the remaining shall be deposited within 15 days of initial deposit
• financial institution can participate in the bidding process, and must bid 10% higher
than the highest bidder
• In case the Bank wins the bid, it must then send a 3 days’ notice to the mortgagor to
match the Bank’s bid and purchase the property
• If there is no bidder the auction must be cancelled and the entire exercise repeated.
If upon 3 auctions no bid is received, the Bank may purchase the property at a price
10% higher than the reserve price, after duly serving the mortgagor with a notice to
this effect
Delivery of possession • for the purpose of executing and registering the sale deed of the mortgaged
and post-sale process property, the Bank shall be considered as the duly authorized attorney of the
mortgagor
• sale deed can only be registered / executed after 7 days of the auction
• Within 14 days of the sale, the Bank must file proper accounts of the sale proceeds in
the banking Court
Injunction • The Banking Court may grant an injunction on grounds that (i) there is no mortgage
(ii) there has been fraud in the mode or conduct of the method of sale and the
customer has suffered loss which cannot be compensated by damages.
• all disputes relating to the sale of mortgaged properties and all related matters shall
be determined solely by the Banking Court “to the exclusion of any other court of
law, including the high court
CRIMINAL ACTION
Section 20 of FIO 2001
• Explanation - Dishonesty may be presumed where a customer has not deposited the sale proceeds of
the property with the financial institution in violation of the terms of the agreement between the
financial institution and the customer.
• (2) Whoever knowingly makes a statement which is false in material respects in an application for
finance and obtains a finance on the basis thereof, or applies the amount of the finance towards a
purpose other than that for which the finance was obtained by him, or furnishes a false statement of
stocks in violation of the terms of the agreement with the financial institution or falsely denies his
signatures on any banking document before the Banking Court, shall be guilty of an offence
punishable with imprisonment of either description for a term which may extend to three years, or
with fine, or with both.
• (3) Whoever resists or obstructs, either by himself or on behalf of the judgment debtor, through the
use of force, the execution of a decree, shall be punishable with imprisonment, which may extend to
one year, or with fine, or with both.
CRIMINAL ACTION
Section 20 of FIO 2001
THANK YOU
& REMEMBER
FACILITATOR`S CONTACT
DETAILS
https://www.youtube.com/c/EverydayLawbyAdnanAdilHussain
www.linkedin.com/in/adnanadilhussain