Credit Manual

Credit ManualUnited Bank Limited

Table of ContentsINTRODUCTION6PORTFOLIO MANAGEMENT71.1 Portfolio management71.1.1 Maximum Exposure Guidelines (MEG)71.2 Supervisory Role:8TARGET MARKET AND PRODUCTS92.1 Target Market92.1.1 Target Market CBG102.1.2 Target Market RB102.1.3 Guidelines112.1.4 Responsibilities112.2 Products122.2.1 Short Term Credit Facilities122.2.2 Term Credit Facilities142.2.3 Project Finance172.2.4 Guarantees (Bonds)182.2.5 Documentary Letters of Credit222.2.6 Financing Against Shares (FAS)242.2.7 Islamic Banking Products252.3 Facilities to be taken Over/Swapped from Other Banks/FIs25CREDIT INITIATION273.1 Standard Credit Application (SCA)273.1.1 SCA for Credits above Rs. 75 M273.1.2 Documents required for credits upto Rs. 75 M283.2 Responsibility293.3 Lines and Special Transactions (One Offs)303.3.1 Sub-Allocation/Re-Allocation of Approved Credit Facilities303.4 Risk Rating Systems323.4.1 Obligor Risk Ratings (ORRs)323.5 Security Classes (Annexure XII)353.6 Facility Risk Rating Model (FRR)36CREDIT APPROVAL374.1 Expected Attributes of Risk Managers/Senior Risk Managers374.2 Appointment of Global Relationship Manager384.2.1 Responsibility of Global Relationship Manager384.3 Credit Approval Structure384.4 Markup parameters394.5 Credit Approval Process394.6 Unusual Risks404.7 Politically Exposed Entities414.8 Revaluation41DOCUMENTATION AND DISBURSEMENT425.1 Documentation Responsibilities425.2 Documentation435.2.1 General435.2.2 Lodgment455.2.3 Temporary Release455.2.4 Permanent Release455.2.5 Expired Documentation455.2.6 Copies in Credit Files465.2.7 Witness465.2.8 Minimum Prescribed Documents for Fund based Facilities465.2.9 Assigned Contract Proceeds Acknowledgement465.2.10 Letter of Guarantee (Company)475.2.11 Deferrals of Security/Support Documentation475.2.12 Facility Offer Letter (FOL)485.2.13 Customers admittance of outstanding Funded +Non Funded exposure on semiannual basis.495.3 General Rules495.4 Facility Utilization555.5 Execution of Agreement55VENDOR MANAGEMENT566.1 Purpose566.1.1 Valuator566.1.2 Mucaddam566.1.3 Clearing and Forwarding Agents566.1.4 Business Information Report Provider576.2 VMC Definition and Constitution576.3 Enlistment of Vendors576.3.1 Scrutiny of Vendors Enlistment586.4 Addition of Regions596.5 Evaluation of Vendors606.5.1 Performance Evaluation of Vendors606.5.2 Suspension616.5.3 Delistment626.5.4 Vendors Delisted/Re-Instated by PBA/UBL626.6 Services of Vendors626.6.1 Valuator626.6.2 Mucaddam636.6.3 Clearing and Forwarding Agents676.6.4 Business Information Report Service Provider686.7 Limit Enhancements706.7.1 Limit Enhancement- Valuator/ Mucaddam706.7.2 Limit Enhancement- C&F Agents706.8 One-Off Approval- C&F Agents71CREDIT MAINTENANCE727.1 Credit Process727.1.1 Administration of Approved Credit Facilities727.1.2 Maintenance of Credit Information827.1.3 General Guidelines837.2 Annual Review and Renewals84REMEDIAL MANAGEMENT868.1 Credit Classifications Responsibility868.1.1 Watchlist868.1.2 Adverse Classification878.2 Classifiable Exposure898.3 Excluded Credit Exposures898.4 Initiating or Changing Adverse Classifications898.5 Remedial Action/Strategy898.5.1 Formal Action Plan908.5.2 Documentation Review908.5.3 Classified Credit Reviews (CCRs)918.6 Provisions928.6.1 Specific Reserves928.6.2 General Reserves958.6.3 Frequency958.7 Responsibility/Reporting958.8 Special Assets Management958.8.1 Transfer of Accounts to SAM/SAM RCADs958.9 Recovery Process988.9.1 Traditional Work Out Modes998.9.2 Non Traditional Work Out Modes1008.9.3 Litigation1028.10 Write-offs1028.10.1 Write-off Mechanism1028.11 Condonation and waivers103LIST OF ANNEXURES104

AbbreviationsB/LBill Of Lading

BODBoard Of Directors

C&FClearing & Forwarding

BRMCBoard Risk Management Committee

CADCredit Administration Department

CBGCorporate Banking Group

CCRClassified Credit Review

CDCCentral Depository Company

CIBCredit Information Bureau

CLCChief Legal Council

CMClassification Memorandum

CODClean Overdraft

CPCommercial Paper

CRMCredit Risk Management

DACDisbursement Authorization Certificate

DFIDevelopment Financial Institution

DHDivisional Head

DODelivery Order

DPSight Letter Of Credit

DPLDrawing Power Limit

ERFExport Refinance

ECAEngagement Committee Approval

FAPCFinance Against Packing Credit

FBPForeign Bills Purchased

FEForeign Exchange

FIFinancial Institution

FIFOFirst In First Out

FIMFinance Against Imported Merchandise

FIRMUFinancial Institution Risk Management Unit

FRRFacility Risk Rating

FSVForced Sale Value

FTRFinance Against Trust Receipt

GEGroup Executive

GRMGlobal Relationship Manager

HRAHead Retail Assets

IBGInvestment Banking Group

IFDBCsInward Foreign Documentary Bills For Collection

L/CLetter Of Credit

LAPCLoan Against Packing Credit

LGLetter Of Guarantee

LIMLoan Against Imported Merchandise

LOSLoan Origination System

LTFFLong Term Finance Facility

LTRLoan Against Trust Receipt

MEGMaximum Exposure Guidelines

MMLMoney Market Line

NABNational Accountability Bureau

NICFNon Interest Cash Finance

NIDFNon Interest Demand Finance

NOCNo Objection Certificate

NPLNon Performing Loan

NSCNational Saving Certificate

ORRObligor Risk Rating

PADPayment Against Documents

PBAPakistan Banks Association

PKRPakistan Rupee

POPay Order

POAPower Of Attorney

PPMProduct Program Manual

PRPrudential Regulations (SBP)

PSRPre Settlement Risk

PTDPermanent Transfer Deed

RACRisk Acceptance Criteria

RCADRegional Credit Administration Department

RCHRegional Cluster Head

RHCARegional Head Commercial Assets

RMRelationship Manager

SAMSpecial Asset Management

SBLCStandby Letter Of Credit

SBPState Bank Of Pakistan

SCAStandard Credit Application

SECPSecurity & Exchange Commission

SODSecured Overdraft

SRMSenior Risk Manager

SSCSpecial Saving Certificate

TFCTerm Finance Certificate

TLTeam Leader

TPCTrade Processing Centre

TRTrust Receipt

UBLUnited Bank Limited

USDUSA Dollar

VMUVendor Management Unit

INTRODUCTION

At UBL, Risk & Credit Policy Group look after various risks embedded in the lending activities of the bank. Credit Risk accounts for major risk associated with the bank. This requires thorough vigilance, monitoring and control.

Credit Policy & Procedures updated in year 2006 have been separated and updated to form two separate documents; Credit Policy and Credit Manual. Credit Policy 2013 is recently formulated and approved by BRMC/BOD while this Credit Manual is separately formulated. This document defines procedural guidelines for products and lending cycle from credit initiation to remedial management.

This document has been created keeping in view the current requirement at the Bank which will aid in seamless accomplishment of the Credit Policy rules and guidelines.

Ownership, Maintenance and Approval

Risk & Credit Policy Group is the owner of this document while the process and procedures laid out here are owned and followed by all concerned departments handling credits. Policy guidelines described in this document are minimum requirements under normal circumstances. However, Risk & Credit Policy Group may make amendments or establish additional controls whenever appropriate. Credit Policy Division will propose changes or additions in this document, if required, and the final approval authority for these changes/additions and renewal of the document is GE R&CP.

Review Period

This document will be reviewed after three years. Meanwhile, any amendments can be made from time to time if required.

CHAPTER 1

PORTFOLIO MANAGEMENT

1.1 Portfolio management

Some concentration limits are already defined in Credit Policy and now additional Concentration limits for portfolio management are being introduced in the bank as follows:

1.1.1 Maximum Exposure Guidelines (MEG)

a) Maximum Exposure guidelines for single Obligor vis a vis clients equity.All CBG/RB/Greenfield limited recourse long-term loans cases will have a cap on exposure Total Financing limits (Funded + Non-funded, while exposure for ERF and non funded facilities to be calculated based on SBP PR definition of exposure) of one time of equity (Equity+ general reserve+ retained earnings+ revaluation reserve+ sponsors subordinated debt+ other equity equivalent).

This will restrict UBL exposure to high risk customers to 25% of total borrowing capacity of the customer as SBP PR allows exposure upto four time of equity. For project finance and CBG customers, this will allow multiple large banks sharing the load in case of unexpected risks.

For CB/CBG sole bank relationship customers, the cap on exposure Total Financing limits (Funded + Non-funded, while exposure for ERF and non funded facilities to be calculated based on SBP PR definition of exposure) as explained above will be two times of equity all other terms being the same. This will provide adequate coverage of security and commitment of sponsors.

b) Maximum Exposure Guidelines for each ORR category.Each ORR category (from ORR 1 to ORR 6) will be applicable for Total Financing limits (Funded + Non-funded. Exposure for ERF and non funded facilities to be calculated based on SBP PR definition of exposure). Following table shows Maximum Exposure for CBG and RB category

ORRCBGRB

11818

21212

375

442.5

51.51

610.5

ORR 7, 8 & 9 being Watchlist Category requires hold of existing level of Total Financing Limits (Funded + Non-funded, while exposure for ERF and non funded facilities to be calculated based on SBP PR definition of exposure) with clear strategy for remedial actions. However, one level higher Credit Committee may enhance/alter facilities for restructuring / reviving the customer as required.

The above two MEG limits (a) & (b) will be applicable to all new customers and enhancement of existing customers Total Financing Limits (Funded + Non-funded, while exposure for ERF and non funded facilities to be calculated based on SBP PR definition of exposure). However, all existing customers who are violating these caps (MEG a & b) will be kept at same Total Financing Limits (Funded + Non-funded, while exposure for ERF and non funded facilities to be calculated based on SBP PR definition of exposure) level during interim/annual renewal and relevant Credit Committee will individually decide and approve hold or reduction as deemed fit. (CAD to provide summary of all existing customers on quarterly basis to Head CRM and HCP)

Any exceptions in MEG (a) & (b) for cases falling ORR 1 to ORR 6 will require sign off of HCP in addition to the relevant CC.

Note: The above guidelines will not apply to All PPM based client relationships.

1.2 Supervisory Role:

In order to strengthen Supervisory Role of Credit Approvers (Risk Managers/Senior Risk Managers) in CRM (for both Corporate and Commercial Credits), Credit approval review process is being implemented in the bank.

All Credit approvers are required to review the approved credits of their one level down credit approvers. This is applicable till the level of Head CRM (meaning the final level reviewing one level down credit approvals will be Head CRM).

CHAPTER 2

TARGET MARKET AND PRODUCTS

2.1 Target Market

It is important for the business groups (such as Corporate Bank, Commercial and Retail Bank, etc.) and risk group to identify and develop target markets and listing of alternate business strategies.

Different business groups which are writing assets in the bank are operating in different market conditions and geographies. They are catering to different industry sectors and various sizes of customers. It is therefore essential to formulate clear Target Market identification for smooth handling of customers and managing the credit risk appropriately.

Product Identification there are certain given products for lending in the prevailing banking system and these products are being utilized by the customers in best possible way. However, only through a comprehensive survey of the market, can a potential business opportunity be identified. New product development on an ongoing basis important and bank do endeavor to do so.

Industry Concentration Credit Policy Division looks after portfolio management of bank loans and formulates various measures including concentration limits and monitors them from time to time. Industry Concentration limit is important to have a diversified portfolio. While developing target markets business groups must also review industry concentrations in order to establish diversified exposure limits.

Screening For individual Industry Segment, a workable and appropriate Risk Acceptance Criteria (RAC) is required to be developed and used to screen the market in a structured manner. The Criteria defines the basic level of acceptability for a risk asset. Bank will develop RACs for major industry sectors after having detailed study of these industries. The responsibility for developing these RACs for all major industries and to regularly update them lies with Research Department of the Bank working closely with CRM and Credit Policy Division.

It is also important to note that the Bank as a large existing Loan portfolio which was build up over decades without any RAC screening. Once the RACS are mapped with the existing clients of an industry sector there would be number of customers which would be following below the RCA hurdle. These Customers will be handled in a normal way and relevant Credit Committee will have the authority to decide about the exposure levels of such customers.

For fresh customers being booked in various industry sectors the mapping against existing RAC hurdle of that industry will be highlighted in the SCA and relevant Credit Committee may evaluate the risk and mitigate it through better facility and security structure.

For any industry sector where an appropriate RAC has not been developed, Business Groups and relevant Credit Committee will decide how to assume additional risk in that industry sector.

The current target market definition for various business groups is given as follows:

2.1.1 Target Market CBG

The target market for CBG will be the corporate clients in all industry sectors of the country and in the areas where the Corporate Centers are present. In these areas the attributes of clients will be:

Sales/Turnover to be more than Rs. 1.5 Billion, and UBLs exposure to be Rs. 300 Mn & above (Funded & Non-Funded) on per party basis, or UBLs exposure to be Rs. 500 Mn & above (Funded & Non-Funded) on a per group basis (if more than one company of the group has borrowing relationship with UBL).

Clients handled other than the Corporate Centers region, even if their exposure falls under the CBG target market, shall be handled by Retail Bank. However, if special circumstances arises & customers willingness is obtained, the Group Executive-R&CP jointly with the Group ExecutiveCBG & Group ExecutiveRB can transfer the relationship handling to CBG; to be handled on a remote basis.

2.1.2 Target Market RB

Retail bank target market for Commercial, Seasonal, SME, Commodity, Trade related products & Agriculture will be as per the Prudential Regulation & exposure handling requirement of SBP respectively for each segments. This will also cover all industry sectors of the country.

Retail bank is present across the country in many regions in form of Commercial Centres or Branches & it will be handling all the assets requirements of such regions. In regions where both CBG & RB are present, all assets which are not falling under CBG target market will be handled by RB in Commercial Centres or branches. However, certain type of industry which are not sophisticated & involve RB handling of relationship will be handled by RB even if they fall under the target market of CBG due to exposure & sales attributes. All such existing relationship being handled by RB (more than Rs. 300 Mn exposure per company) will continue to reside in RB. Any fresh client which is required to be booked by RB & falls under CBG target market will require NOC from Regional Corporate Head of the concerned region of CBG.

Additionally, GOP commodity operations (TCP, PASSCO, Govt of Punjab, Govt of Sindh, etc.) will be handled by RB.

2.1.3 Guidelines

Business groups will formulate target markets in coordination with the Credit Policy division for all business segments. Target market formulation will be conducted through study of banking industry of the country and the prevailing segmentations of the industry sectors, geographies, etc; and For section of market where there are standardized lending products and techniques the Product Program Manuals (PPMs) will be prepared to facilitate marketing and quick approvals for standard products.

2.1.4 Responsibilities

Ownership of given Target Market lies with each Business group and changes required needs to be discussed and finalized with Risk & Credit Policy Group.

For the standardized products business groups will be responsible to develop and originated Product Program Manuals. After recommendation by respective Business Units and respective Group Heads, PPMs will be approved by Head Credit Policy and GE R & CP.

For matters relating to the Credit Administration Division (CAD), Operations, Finance, Treasury, etc. relative Division Heads and/or Group Heads will also be consulted and sign off will be obtained.

Product Program Manuals will be originated and recommended by respective Business Units and will be approved by respective Group Heads including Group Executive (Risk & Credit Policy). For matters relating to the Credit Administration Division (CAD), Operations, and Treasury, relative Division Heads and/or Group Heads will also be consulted.

Development of Product Program Manuals is an ongoing process, made all the more necessary as more innovative products come on line. A list of currently approved manuals is shown in Annexure No. I.

Credit Proposals need to be in line with target market screens. Risk Acceptance Criteria screen scoring and respective hurdle scores become effective for those industries where industry studies have been completed and Risk Acceptance Criteria are in place.

2.2 Products

Bank offers wide variety of products including short term credit facilities, trade products, term credit facilities and Islamic banking products. While Credit Policy defines products offered by the bank in detail, procedural matters where further explanations are required are detailed as under:

2.2.1 Short Term Credit Facilities

2.2.1.1 Foreign Bills Purchased against L/C (FBP) & FBP (Disc)

Bank may extend financial accommodation through negotiation and/or discounting of a foreign documentary bill accompanied by relevant documents of title to goods at the prevailing exchange rate. For financing of export bills drawn under a letter of credit it should be ensured that:

The document has been drawn strictly as per the terms of the letter of credit; All direct bank expenses i.e. foreign correspondents charges, claimed by the opening/reimbursing bank, if any, shall be recoverable from the exporters unless it is expressed in the letter of credit that charges are on the openers account; Due care and necessary precautions are exercised before negotiating/discounting of documents; Reimbursement instructions in letters of credit are carefully studied before negotiating/discounting of documents; If the bill of exchange is accepted by a Bank approved by the FIRMU, the associated risk for discounting will be considered Bank Risk; and A letter of indemnity is obtained from the customer by TPC.

If documents are complete but not exactly as per terms of L/C it will be considered as bank risk and will be booked as FBP (Disc).

2.2.1.2 Payment Against Documents under sight L/C (PADs)

Import documents received under sight letter of credit are lodged in PAD, and are retired upon payment including markup (on PAD) from the customer. Import documents shall be checked strictly in terms of the letter of credit to ensure that there is no discrepancy. In case of a discrepancy in the documents, the negotiating bank must be immediately advised by SWIFT regarding such discrepancy and dealt with accordingly. In case of import documents received free of discrepancies, the amount of the bill plus charges, if any, claimed by the negotiating bank, would be converted into Pak Rupees/local currency at the exchange rate prevailing on the date of lodgment, or at the booked rate where exchange was booked at the time of opening of the letter of credit as quoted by the Treasury Division.

2.2.1.3 Finance/Loan against Imported Merchandise (FIM/LIM)

Facility for financing goods imported under sight letters of credit established by the Bank may be extended at customers request.

Relationship Managers (RMs) are required to inform their customers and Heads of TPC to ensure that documents are released to approved Clearing & Forwarding (C&F) agents after arrangement of funds for custom duty and other charges have been secured (made).

Exceptions to be reported to Country Head CAD and Head Credit Policy.

2.2.1.4 Booking FIM Liability

PAD will remain outstanding and FIM will not be booked until the goods are physically handed over to the Banks Mucaddam and placed under pledge. However, in case, LC is being retired through FE-25 (import) loan, goods cannot be taken under pledge at the time of booking of liability. In this case FE-25 TR facility will be allowed, subsequently, FE- 25 (TR) will be transferred to FE- 25 Pledge within a maximum period of 20 days. Similar procedure shall be followed for loans booked in PKR.

If partial shipments are allowed under LC, FIM will also be booked in tranches. The Mucaddam shall submit a stock report in order to calculate the drawing power limit and simultaneously the FIM limit should be input into the system by the RCAD to enable Operations to transfer the outstanding from PAD to FIM.

In cases where marine insurance does not cover transit insurance, separate transit insurance in addition to port to port insurance should be obtained.

Customers will be required to maintain sufficient funds in their accounts with the bank for issuance of a pay order/cashiers cheque or otherwise provide a pay order/cashiers cheque for payment of custom duty and other charges, so that C&F Agent can clear goods and hand over the consignment to Banks Mucaddam. RCAD will nominate mucaddam in consultation with Head RCAD North/South (alternatively in consultation with Country Head CAD) for pledge of stock and TPC will coordinate with Mucaddam for pledge.

In cases where FIM is booked under sight LC and it has to be retired by banks own approved facilities (FE-25 or PKR) of the client, RCAD will appoint mucaddam simultaneously with the C&F agent with clear instructions to mucaddam to take control of goods from the port once handed over by C&F agent. RCAD will provide details of such goods taken up by mucaddam from port and once it reaches the customers site.

2.2.2 Term Credit Facilities

Following procedure shall be followed while extending long term loan/financing facilities;

2.2.2.1 Commercial and Industrial Loans:

Financial Forecasts

1. All proposals for long term loans or financial guarantees, SBLC and/or usance letters of credit/deferred payment with tenor for more than one year must be accompanied by financial projections including balance sheets, profit and loss, and cash generation statements with assumptions covering the tenor of the facility. In addition to financial forecasts, term loan proposals will also require project feasibility; and2. Financial Projections are not required for contingent exposures covering bid, performance, and advance payment bonds with tenors of three years. However, if the tenor exceeds three years, projections must be obtained.

Exceptions (for I and II), if any, shall be approved by the GE-R&CP.

Default Clause

The loan agreement shall contain the following default clauses in addition to general default clauses and default of any of these clauses would cause prompt remedial action or loan may be recalled;

1. Borrowers failure to service two consecutive installments of principal or mark-up on due dates as per the terms of the credit approval;2. If any information statement, certificate, or representation given by the borrower proves incorrect or untrue;3. If the borrower becomes insolvent or bankrupt or consents to appoint liquidator or receiver;4. If any bankruptcy, liquidation, or recovery proceedings are initiated against the borrower by any bank; and5. If the borrower fails to fulfill any covenant, term, or condition of the Loan Agreement.

Non adherence of any of the above clauses would trigger prompt remedial action or recall of loan. Exceptions, if any, (for a and e only) shall require approval of relevant Credit Committee (CC).

Standard Covenants

All funded term credit facilities must be documented through an appropriate loan agreement drawn up and reviewed by the Banks legal counsel. Such loan agreements must include the following provisions:

Borrowers will furnish the Bank with audited financials within maximum 180 days after close of financial year; A material adverse change clause among the conditions precedent; A definite date for the termination of the availability period; Unless waived by the concerned Group Executive, commitment fee should be included as a part of the compensation; Borrower will maintain leverage ratio as prescribed by SBP and current ratio as per banks policy; Bank will arrange valuation of assets by a UBL enlisted valuator, nominated by RCAD (in case of syndicated loan, valuation to be carried out by the valuators nominated by the lead bank); Borrower will maintain its project assets adequately insured against all standard risks; Borrower will promptly pay all obligations to Bank and other agencies, such as government taxes, dues etc.; Borrower will not create lien, mortgage, or encumbrance over its assets without written consent of Bank; Borrower will not enter into any merger or amalgamation or sell/lease its assets other than in the ordinary course of business without the written consent of Bank; Borrower will not change its legal status, majority ownership, or management structure without written consent of Bank; Borrower will not guarantee, endorse, or otherwise become surety for others, except the usual negotiable instruments in the normal course of its business; Borrower will not make any loan to or invest in subsidiaries except in the normal course of its business; and Borrower will not declare any dividend if financial covenants are not met without written consent of the bank. Exceptions may be provided for syndicated loans.

In case of syndicated loans, exceptions, if any, shall require approval of relevant CC including Head CRM/GE-R&CP.

Documentation Review

Documents required under the provisions of term loan agreement, such as Board Resolutions, Powers of Attorney, Memorandum and Articles of Association etc., must be reviewed by legal counsel that is engaged for the preparation of term loan agreement with a view to determining their validity and protective value.

General Conditions

Banks commitment must contain a specific maximum monetary liability.Banks commitment must contain a specific, legally defensible expiry date.

Other Rules Governing Term Loans/Facilities

Under these rules, any material change in the terms and conditions or covenants of a term credit as originally approved must be referred to the original level of approval. Any unused commitments, except as provided for under the rules for sub-allocation of credit facilities, can only be utilized for the purpose originally approved, and cannot be intended to accommodate other needs. Unused commitments no longer necessary for the purpose originally approved must be cancelled.

2.2.2.2 Syndications

Syndication activities are divided into Primary (i.e. up to financial close) and Secondary (i.e. post financial close) distribution.

2.2.2.2.1 Primary Distribution

All Syndication transactions shall be routed through the Investment Banking Group (IBG). IBG will be responsible for:

Investment Banking Engagement Committee Approval (ECA); Transaction structuring; Primary distribution; Transaction documentation, including liaison with transaction legal counsel; Overall internal and external management of the transaction; and Monitoring the risk for life of loan.

Corporate Banking Group (CBG)/International Group/Financial Institutions Group (FIG)/IBG will be responsible for:

All credit related matters pertaining to a syndication; Relationship management; and Jointly monitoring the risk with IBG for the life of the loan.

CBG/International Group/FIG and IBG will be jointly responsible for term sheet/mandate negotiation with the client. In case of restructuring of syndicated facilities, IBG and CBG/International Group/FIG will jointly handle the arrangement.

When pitching for a Syndication mandate or considering participation in a Syndicate, the Bank shall endeavor to maximize non-interest earnings (including fee income) from the transaction.

Syndications that are led by the Bank shall be jointly handled by IBG and CBG/International Group. FIs will be involved whenever required. In such cases, CBG participates and IBG arranges the remaining amount of syndicate through additional contribution from other financial institutions.Syndications that are led and arranged by other financial institutions in which UBL participates as a minor or major participant, shall be jointly handled by IBG and CBG/International Group/FIG.

A complete SCA is required to be prepared and submitted for approval covering the term loan requirements as mentioned in the Policy. The SCA will be prepared by CBG/International Group/FIG and concurrence of Group Head IBG will also be required where the bank is the syndicate leader/arranger.

2.2.2.2.2 Secondary Distribution

Where Syndication involves sell-down of all or part of the Banks exposure post financial close, the following procedure shall apply:

1. The terms of a sell-down, including the amount, pricing and timing, shall be jointly agreed between CBG/International Group/FIG and IBG;2. Subsequently CBG/FIG shall formally request IBG to affect a sell-down after obtaining the prior endorsement of the CC including Head CRM/Head Credit International/GE-R&CP;3. The sell-down request, once provided to IBG, shall be considered irrevocable. Exceptions, if any, to be approved by the CC including Head CRM/Head Credit International/GE-R&CP; and4. IBG shall endeavor to achieve the subject sell-down as per approval requirements.

2.2.3 Project Finance

Procedure for Approval

All Project Finance transactions shall be routed through IBG.

1. IBG shall be solely responsible for transaction management up to first drawdown - this encompasses all aspects of the deal including structuring, modeling, documentation, coordination amongst internal and external stakeholders (including Trade and Treasury), liaison with regulators, and contact/negotiation with Project personnel. To ensure maximum efficiency of resources, IBG may selectively request CBG relationship/administrative support during this process;2. IBG shall be solely responsible for: a) Developing and writing the SCA;b) Elevating it through the risk management chain;c) Obtaining any waivers and/or alterations that may be required to perfect the credit prior to facility effectiveness;3. The credit package will be signed off by both IBG and CBG;4. Direct CBG involvement in transaction management would begin when the project finance principal reaches 50% outstanding. First drawdown and further drawdowns will be managed by IBG and CBG will be informed. Thereafter direct IBG involvement would decline progressively with each subsequent repayment; 5. Ownership and primary responsibility for account administration and relationship management shall pass on to CBG immediately after outstanding loan amount falls to 50%. This also implies that all decision making in connection with the facility and the relationship shall also be transferred to the asset writing team. CBG will be designated as the primary point of contact vis--vis the Facility Agent and would attend syndicate meetings (IBG may accompany if required), respond to facility correspondence, and take charge of all credit related matters; and6. From that point forwards, IBG will act solely in an advisory capacity but will nonetheless continue to independently monitor project progress. In any event, IBG support would remain committed and available as and when required by CBG.

The bank shall ensure that guidelines on project financing/infrastructure project financing issued by SBP are adhered to.

2.2.4 Guarantees (Bonds)

Primarily, guarantees would be issued in accordance with SBP guidelines. For the purpose of issuance of guarantee, Bank will ensure that the following features are included in the text of the guarantee:

The guarantee must be issued as per approved text and formats by in house legal counsel or vetted by a counsel nominated by legal division; The guarantee must be for a clear, well-defined purpose and for a specific amount and period and shall contain claim lodgment date; The text of the guarantee will have a reference to the underlying contract agreement stipulating the Bid or Performance Bond or Advance Payment Guarantee etc. as the rationale for issuing the guarantee; Payment under the guarantee will be made upon beneficiarys request or upon presentation of an agreed document (viz statement of claim) or set of documents along with guarantee in original, if claim is lodged within validity of the guarantee; The guarantee shall state the maximum amount of the Banks commitment in clear terms both in figures and in words; and The guarantee must have a specific expiry date, and all claims must be lodged before the expiry date.

2.2.4.1 Guidelines

Necessary credit approval as per Banks standard practice and procedures must be obtained prior to issuance of any bond or guarantee; The customer on whose behalf the guarantee is being issued must agree to and sign the text of the guarantee concurrently with the signing of a counter guarantee. Such counter guarantees shall include a request for the issuance of guarantee as well as an irrevocable commitment from the customer to reimburse the Bank on demand; Stipulated margins and collaterals will be realized upfront and applicable commission will also be recorded, preferably upfront, or as approved by the relevant CC; A valid DAC issued by the RCAD must be in place prior to the issuance of any bond/guarantee; and RCAD will monitor expired guarantees, with a view to obtain guarantees back after expiry and decontrol the liability as per banks policy.

2.2.4.2 Execution of Guarantees/Bonds

While executing a guarantee following aspects will be considered:

1. The terms and conditions of the guarantee must be examined carefully to determine the:

Type of guarantee; Unusual conditions which could create unforeseen circumstances; Extent of Banks obligation; and Financial liability under the guarantee.

2. After the guarantee has been issued, a copy of the same will be attached to the counter guarantee executed by the customer along with a draft of the guarantee signed by the customer for record. Standard text of LGs attached (Annexure II).

2.2.4.3 Booking of Liability against Counter Guarantee of a bank/ Financial Institution:

Sometimes business units extend credit facilities to their customers and/or issue guarantees/bonds on the strength of a Counter Guarantee issued by a bank or other Financial Institution having Financial Institutions Risk Management Unit (FIRMU) approved Guarantor lines.

Prior to undertaking any such transaction, the procedural guidelines as stated below are required to be followed by respective business units/TPC/RCADs;

Procedural Guidelines

1. A guarantor line will be established by FIG in respect of a Bank/Financial Institution, counter guaranteeing the transaction; and2. The liability will be controlled as under:-

In case where a guarantee/bond is required to be issued on behalf of a local customer, on the strength of a Counter Guarantee of a bank/DFI, the respective business group will get an appropriate credit line approved from the relevant CC and guarantor line approved from FIRMU. Liability will be booked in the name of the customer.

In case where guarantee/bond is required to be issued on behalf of a Foreign Customer/Supplier/Contractor etc. on the strength of a Counter Guarantee of a Bank/DFI, the establishment of line will not be required. In such cases, the liability will be booked in the name of FIRMU approved Foreign Bank, counter guaranteeing the transaction.

In both cases, a Disbursement Authorization Certificate will be issued by the RCAD to cover the transaction.

Decontrol of Contra Liability

Prudent banking requires reversal of contra liability relating to a Letter of Guarantee as soon as feasible after its expiry date mentioned in the guarantee. As per legal advice if an instrument clearly defines its expiry date and no claim has been received during its validity, the guarantee is deemed to be expired on the due date and the right of the beneficiary to make a fresh claim under the guarantee ceases to operate unless the beneficiary can prove that the claim was lodged before the expiry date.

However, as per practice, the business units do not reverse the liability unless the original instrument is received back duly cancelled, or a letter of disclaimer is received from the beneficiary. This results in an unnecessary accumulation of contingent liabilities as the beneficiaries fail to return the original guarantee after its expiry date, or sometimes the original guarantee is lost.

To reduce unnecessary outstanding of contingent liabilities across the country the task for reversal of contra liabilities will be undertaken in two phases.

Henceforth the Branch/Business unit Operation/TPC will follow the below mentioned guidelines for reversal of the contra liabilities relating to all expired LGs:

PHASE 1

Review each expired LG (Including those favoring Federal/Provincial Government Departments) to ascertain that:-

It contains a specific expiry date; Text of the Guarantee does not have the automatic renewal clause; and No claim has been received during its validity period, in other words the period applicable before the expiry date.

PHASE 2

After having completed the above exercise and for the purpose of settlement of each case following action to be undertaken:-

A formal letter to be sent to the beneficiary stating, inter alia, that no claim has been lodged with the Bank by the beneficiary in terms of the guarantee during its validity period and that the guarantee has expired and the Bank stands released and discharged of any liability under the guarantee, hence, return the original letter of guarantee. This letter should be sent by registered post or by courier service; Follow up with two reminders on weekly basis to the customer and one reminder to beneficiary. (Annexure III - reminder I and II, Annexure IV-Final reminder); and The customer is also required to be notified in writing (through registered post) that the guarantee has expired, retrieve the original guarantee duly cancelled from the beneficiary and surrender it to the Bank. (Annexure V)

In case where the original LG is surrendered:

Cancel the original LG by marking CANCELLED within 2 parallel lines on the face of the letter of guarantee; Reverse contra liabilities; and Refund margin, if retained, and release the securities, obtained at the time of issuance of L/G after obtaining approval from the relevant CC.

In case where no response is received from the customer/beneficiary:

Transfer the contra liability and park it in the expired LG by reducing its value to Rupee One after a period of 30 days from the date of the final reminder letter sent by registered post and courier service; Refund the margin, if retained and release the securities after obtaining an indemnity drafted by the Chief Legal Counsel (CLC) from the customer (Annexure VI); Send 6 reminder letters to the customer on quarterly basis for retrieval of expired LG (Annexure VII); If the original LG is surrendered: Cancel the original LG by marking CANCELLED within 2 parallel lines on the face of the letter of guarantee; Reverse the contra liability booked under expired guarantee GL with Rupee One and close the file; and Refund margin, if retained, and release the securities, obtained at the time of issuance of L/G after obtaining approval from the relevant CC. If the original LG is not surrendered the contra liability booked under expired guarantee GL with Rupee One may be reversed after a period of 30 days from the date of 6th reminder letter sent by registered post and courier service and close the file.

Where LG is Open Ended (without expiry date):

No action will be taken to reverse the liabilities unless original LG is surrendered or beneficiary issues a Letter of disclaimer stating that they have no claim whatsoever under the guarantee and beneficiary has no objection to reverse the contra liability; Upon receipt of the original LG: Cancel the original instrument by marking CANCELLED within 2 parallel lines on the face of the LG; Reverse the contra liability either upon receipt of the original LG or receipt of letter of disclaimer from the beneficiary; and Refund margin, if retained, and release the securities, obtained at the time of issuance of L/G after obtaining approval from the relevant CC.

All securities including margin, securing the LG shall be released only after obtaining the approval of the relevant CC.

2.2.5 Documentary Letters of Credit

2.2.5.1 Third Party Documentary Letters of Credit

Documentary Letters of Credit established on behalf of third parties (parties other than the obligor/customer) represent an additional element of risk. Therefore, if imports on behalf of third parties are required, line descriptions should clearly state accordingly. Furthermore, the customer should confirm that the L/C is issued at customers risk and liability. Customer will also sign on L/C application as guarantor.

Compliance with relevant Prudential Regulations must be ensured for 3rd party L/Cs.

2.2.5.2 Inland L/Cs

Trust receipt to be obtained at the time of opening sight/usance inland L/Cs.

2.2.5.3 Third Port/Country Imports

If imports into third countries are required, line descriptions should clearly state port/country of destination, items to be imported/procured etc.

Conditions

100% cash margin will be required for Import of perishable items and chemicals. For relaxation of margin requirement specific approval of CC will be required; LC for import of banned items will not be established; It will be ensured that specific approvals are obtained for third party and third port/country L/Cs from the relevant CC; Trust receipt shall be obtained to protect banks interest; Margin requirements shall be determined by the bank taking into account the risk profile of the customer; Business Units/CC must ensure: Adherence to margin restrictions stipulated by SBP/Central Banks at Overseas Centres. Demand and turnover of the product/commodity in the market; Durability, salability and estimated realizable value of merchandise/commodity being imported; Custom duties and import tax structure; Financial strength of the customer; Banks experience of dealings with the customer; and Profitability of the relationship.

2.2.5.4 Shipping Guarantees

Customer Documentation

In all cases involving shipping guarantees, the customer will sign standard shipping guarantee application that includes an irrevocable undertaking that the related shipping documents, when received, will be accepted unconditionally, regardless of discrepancies.

Missing Invoices

In case of documentary collections when the invoices are not available with the Bank, the value of merchandise for issuance of shipping guarantees against cash margin/cash collateral as per policy will be established on the basis of supporting documents relating to price along with an undertaking to indemnify the bank in case of any fluctuation in price resulting in a shortfall in value. In such cases, specific approval of relevant CC will be required.

Open Ended

The requirement for a fixed expiry date will be considered waived in all cases since carriers and Customs Department do not accept shipping guarantees with a stated expiration date.

Decontrol

Shipping guarantees can be decontrolled after settlement of documents in the following scenarios: Return of original shipping guarantee; When original Bill of Lading (B/L) is with the bank, and provided that two follow-up reminders letters for return of original shipping guarantee have been sent to the importer by registered port and courier service with an interval of 2 weeks each; and The original Bill of Lading should be kept in the file to serve as evidence in the event the shipping agent inquire or call on the shipping guarantee. CC approval for the amount of the transaction should be taken.

2.2.6 Financing Against Shares (FAS)

To manage credit risk on account of FAS facility, Market and Treasury Risk will issue list of approved shares. It will be responsibility of Market and Treasury Risk to ensure market liquidity for sell off in case margin calls are not met.

Disbursements against the approved lines are subject to availability of Drawing Power (DP) which is equivalent to the market value of the pledged securities plus margin as per approval. If the drawing power falls below the outstanding amount, Treasury Middle Office (TMO) notifies DP shortfall to the respective RM/Business Head and RCAD.

If deterioration in market value of the pledged securities continues and the margin falls below 25%, a margin call is generated to the customer. Customer is required to top up the security in order to cope up with the margin call and bring outstanding exposure at least equivalent to DP. If the customer fails to comply with the banks instructions after three calls, the respective business unit is authorized to offload the security without giving any further notice to the customer within three working days.If the margin held falls below 20% and the customer does not replenish the shortfall after three margin calls bank will sell the shares of the customer to reduce the outstanding after obtaining approval from GE- Treasury & Capital Markets.

Criteria for extension of Credit Facilities against Shares is detailed below:

1. Shares accepted as security must be of a public limited company, quoted on the local Stock Exchanges and approved by Market and Treasury Risk;2. Shares should be widely held by the public and well traded in the stock exchanges. This will facilitate easy disposal should the need arise;3. Share should not be owned by the minors;4. Shares should be in marketable lots. If such is not the case, a Power of Attorney is to be obtained from the owner(s) to enable the bank to split shares into marketable lots;5. Pledge of shares should be accepted ONLY through Central Depository System maintained by Central Depository Company of Pakistan Limited (CDC);6. Financing against shares will be allowed only if all regulatory requirements stipulated by the SBP/Central Banks at Overseas Centers are met; and7. The value of pledged shares shall be monitored regularly and marked to market. In order to better manage risk, the Treasury Middle Office (TMO) will monitor the positions created by Margin Financing or Lending against Shares. All proposals pertaining to Margin Financing or lending against shares require concurrence of Head TMO, who will monitor the Banks exposure and keep it in line with SBPs directives and regulations for financing against shares.

Exceptions to the above instructions will be approved by G.E. Risk and Credit Policy on the recommendation of respective Business Group Executive.

2.2.6.1 Documentation

1. Pledge Agreement to create lien on the shares;2. The shares shall be kept in a CDC account with Banks lien marked on it;3. In case of lending to a partnership firm whose liability is unlimited by law, joint and several guarantees must be obtained from each partner. The aim is to ensure each partners awareness of his or her personal liability towards the full debt;4. Board Resolution of the company authorizing specific person(s) to pledge approved shares/securities with the bank (pledge of third party shares). A letter of lien with the rights to set off will also be obtained; and5. In addition to other documents, Agreement for Sale & Buy Back of marketable securities (IB 1026) shall be obtained from the borrower.

2.2.7 Islamic Banking Products

The bank shall follow documentation and related formalities as required by sharia advisor and verified by the banks legal counsel.

2.3 Facilities to be taken Over/Swapped from Other Banks/FIs

Whenever credit facilities are being taken over/swapped from another bank/FI, the following guidelines are to be followed:

1. Prior to making swap arrangements, RM/Team Leader (TL)/Unit Head/Regional Corporate Head (RCH)/Regional Head Commercial Assets (RHCA)/HRA should complete the SCA package and obtain necessary approvals from the CC. The RM/TL/RHCA/RCH should mention details of the documents to be deferred;2. Swap arrangements would be completed through CLC pre-approved legal counsel, having experience and expertise in corporate affairs, revenue records verification, and other related matters;3. Banks Mucaddam shall verify the quantity and quality of pledged stocks and provide a provisional stock report. In case of hypothecated stocks, a report from an out-sourced company or satisfaction report from the TL/RHCA/RCH is to be obtained;4. After applying prescribed margin on the value of pledged goods reported in the provisional stocks report, cashiers cheque will be exchanged against the physical delivery of goods to the banks Mucaddam simultaneously and the required documents as per approval obtained by RM/TL/RCH/RHCA/RCH/HRA will be lodged with RCAD; 5. An undertaking is to be obtained from other/counterparty bank(s) regarding swap of facilities and it shall be drafted by legal counsel covering in detail, besides other aspects of the deal, specifically the following:

The customers Bank shall hand over to UBL all security documents and/or title deeds and pledged stocks held against the financing being swapped simultaneously in exchange for banks cashier cheque in full and final settlement of all liabilities of the customer being swapped as per arrangements and no claim shall be entertained in the future. A No Objection Certificate (NOC) regarding vacation of all charges/redemption is to be signed by the customers bank and handed over to UBL on the same day.

Exceptions, if any, shall be approved by Head CRM.

6. CLC/ approved Legal retainer shall draft undertaking to be obtained from the customer regarding completion of all legal documentation formalities;7. Before proceeding for swap, latest search report shall be obtained from Securities & Exchange Commission of Pakistan (SECP) to ascertain any outstanding charges against the company;8. Simultaneous execution of all charge documents and Personal Guarantee(s), where required along with Personal Net Worth statement shall be ensured;9. As a matter of policy, deferrals/waivers relating to swap transactions will be discouraged. Any deferral/waiver of documents, if required, will be approved on case to case basis by Head CRM;10. Written Bank checking of all banks of customers and market checking is essentially required;

CHAPTER 3

CREDIT INITIATION

Credit initiation involves an in-depth analysis of the customer based on key financial, operational and organizational information and thus acts as a basis for appropriate risk assessment. Documentary requirements and details of requirements of Credit Application Package along with Risk Rating Systems, has been defined to aid the initiation process

3.1 Standard Credit Application (SCA)

Currently two SCA packages exist. The Standard Credit Application package is used for credits above Rs. 75 million. The Simplified Credit Application Package is used for credits upto Rs. 75 million. Both packages contain several documents which are listed in the subsequent sections.

3.1.1 SCA for Credits above Rs. 75 M

The Standard Credit Application package (Annexure VIII) for initial extensions of credit and for annual reviews is expected to contain a comprehensive appraisal for the relationship. The application should be accompanied by a set of supporting documents, collectively described as the SCA Package, comprising the following:

1. Executive Summary;2. Standard Credit Application;3. Facility Appendix;4. Basic Information Report;5. Comparative position of financial statements;6. ORR sheet;7. Facility Risk Rating (FRR);8. Risk Acceptance Criteria (RAC), where applicable;9. Borrowers Basic Fact Sheet;10. CIB report on the customer and group companies, where applicable;11. BRR report, where available;12. SBP observation/annexure, if any;13. RCADs observations sheet, if any;14. Valuation Report and Desktop Valuation Report where applicable;15. Audited financial statements (three years auditor band to be mentioned); 16. Latest management accounts of public limited company and where required;17. Customer Profitability sheet;18. Project feasibility, financial projections along with assumptions for long term loans;19. Call report and site visit report;20. Prudential Regulations Check List;21. Bank and Market Checkings;22. Memorandum & Articles of Association (for new customers);23. Letter of undertaking for proper utilization of facility;24. Central Liability Report;25. Stock Report, where applicable; and26. Stock Inspection Report (Hypo and Pledge), where applicable.

3.1.2 Documents required for credits upto Rs. 75 M

The Simplified Credit Application package for credits below Rs. 75Mn (Annexure IX) comprises of the following documents.

1. Simplified Credit Application;2. Basic Information Report;3. Facility Appendix;4. Bank Checking;5. Market Checking by approved outsourced agency;6. CIB report on the customer and group companies, where applicable;7. Borrower Basic Fact Sheet;8. Audited Financial Statements (three years auditor band to be mentioned) (preferred for cases where SBP allows exemption);9. Latest management accounts, where required;10. ORR Sheet;11. Facility Risk Rating (FRR);12. Risk Acceptance Criteria, where applicable;13. Customer profitability sheet;14. Comparative position of financial statements;15. Call Report/Site Visit Report;16. Project feasibility, financial projections along with assumptions for long term loans, etc;17. Memorandum & Articles of Association (for new customers);18. BRR report, where available;19. SBP observation/ annexure, if any;20. RCAD observations sheet, if any;21. Valuation Report and Desktop Report, where applicable;22. Central Liability Report;23. Stock Report, where required; 24. Stock Inspection Report (Hypo and Pledge), where required;25. Prudential Regulations check list; and26. Letter of undertaking for proper utilization of facility.

After implementation of Loan Origination System (LOS) all CBG SCAs are required to be routed and approved on LOS. While all RB cases will gradually be taken on LOS system due to long transition period and large number of customers.

Exceptions to the Standard Credit Application

1. Applications submitted for interim reviews need not be accompanied by all documents listed above, except to the extent compatible with the purpose of the presentation and mandatory requirements. Instead, interim reviews should refer logically to the approved SCA already in place and, if necessary, update the information. Aside from this, comments can be limited to the transaction for which approval is being sought.2. Applications having only facilities that are fully covered by Security Class 1 need not be accompanied by a full package unless it is mandatory or required by the approving authority. However, care should be taken to ensure that relevant information is properly recorded.3. Excess over limit cases upto 10% of Total approved facilities can be submitted on memo/email with proper purpose, rationale and justification.

Presentation

Annexure VIII and IX include detailed guideline to present the analysis in accordance with the complexity of the transaction, the customers financial position, and the degree of risk involved. Presentations are expected to be complete, and no essential elements are to be omitted. Current Ratio shall be calculated as per Annexure X.

The Credit Proposal Package for the FIRMU is comprised of a Credit Application face and a data sheet that originates from Bankscope (a specialized software). The format of the Credit Proposal package for FIRMU is attached (see Annexure XI).

3.2 Responsibility

Business Units will be responsible for credit initiation and for accuracy of information in the SCA package. Preparation of the SCA package will involve the following broad steps:-

1. Establishing and maintaining contacts with clients;2. Receiving credit requests from clients;3. Collecting required information from applicants and independent sources;4. Analyzing financial and market position of applicants;5. Assessing security and support being offered;6. Negotiating appropriate pricing, and terms and conditions; and7. Incorporating required information into respective forms.

The responsibilities of CAD regarding credit initiation are outlined below:

Receive Simplified/Standard Credit Application through LOS. The date of receipt at RCAD will be automatically tagged in LOS and can be checked for monitoring purpose; Review Standard Credit Application. Verify Standard Line Description, Security Description and compliance with Prudential Regulations and Credit Policy and Credit Manual; and Ensure that any errors, omissions, and/or deviations from the above are highlighted and returned to Relationship Management for correction and/or amendment. The queries in this regard can be raised through emails or Loan Notes feature available in LOS. In any case RCAD queries and Business response should be made integral part of Loan Application.

RCAD to:

In case of electronic routing, a unique credit application number is assigned by LOS to each credit applications. Whereas in case of manual routing RCAD will assign a routing number (log in routing register), and ensure that all relevant documents are attached, e.g. BIR, BBFS, CIB report, Bank/Market Checking, Financials, etc, and CAD Issues Sheet (if any); Initial all pages of facility appendix; Check BBFS and ensure that all fields are filed by RCAD; The credit committee will be selected by LOS automatically based on the certain parameters to be filled by the respective Relationship Manager. RCAD is required to review data fed by the RM in those parameters and identify if any parameter is left unfilled by the RM. (Select relevant Risk Manager/Senior Risk Manager or higher level Tier as per customer/group Risk Weighted Exposure/Security Classes (Annexure XII) for the manual routing); In case of manual routing, prepare and sign routing memo, which is to be attached to the completed SCA Package; Execute Pre-Approval Checklist ensuring that all documents are attached with the loan application as required by UBL Credit Policy and SBP Prudential Regulations; Circulate package to the relevant CC.

Credit Risk Management (CRM), CBG, RB and FIRMU shall formulate a Service Level Agreement where TAT should be defined for credit proposals.

3.3 Lines and Special Transactions (One Offs)

3.3.1 Sub-Allocation/Re-Allocation of Approved Credit Facilities

1. The unutilized portion can be sub-allocated/re-allocated to establish a new facility or to increase another existing facility under the following conditions as per the format attached (Annexure XIII):

The Disbursement Authorization Certificate (DAC) will be issued after all documentation formalities for the facility to be sub-allocated have been completed. All regulatory requirements that apply to the sub-allocated line have been met. Risk of new/ increased facility is equal to or lower than the risk of the facility prior to the change i.e. from Fund Based to Non-Fund Based. Tenor of the new or increased facility is equal to or shorter than the tenor of the previously approved facility. The facilities are for any related borrower of equivalent risk within the same customer group relationship, provided cross company guarantees are obtained. Sub-allocation may also be allowed to associated concerns of sole proprietorship and partnership firms if required criteria are met. For sub-allocation to any group concern comprised of Limited Companies, it will be ensured that the particular group concern complies with all applicable prudential regulations for the level of exposure being sub-allocated. There is no deterioration in security/support documentation already held. Additional security/support documentation may be obtained before utilization of the sub-allocated line, if required.

SCHEDULE OF FACILITIES THAT MAY BE SUB-ALLOCATED BASED ON ABOVE

S.NO.FROMTO

1.NICFERF I, II, FAPC, FBP-A/CL/C Sight, LC-DAL/G (with a tenor not more than one year)

2.L/C-DAL/C SightL/G (with a tenor not more than 6 months)

3. Financial InstitutionsFunded lines as specified in Credit Policy.

Non-funded lines as specified in Credit Policy.

Non-Funded Lines (e.g. STT, guarantor line or custodian line or intermediary line or vice versa) considered as equal risk

In addition to the above schedule unutilized portion of approved lines for NICF/ERF I-II, FAPC and FBP-A can also be allocated for US Dollar Financing under FE 25.

3.4 Risk Rating Systems

3.4.1 Obligor Risk Ratings (ORRs)

The methodology for the evaluation of ORR is given below.

3.4.1.1 Methodology

The ORR is evaluated using the ORR Grid for Corporate, Commercial, SME, Individuals and FIRMU (Annexure XIV, XV, XVI and XVII). The following guidelines may be used to arrive at the numerical ORR for a particular borrower (further details for calculation of Corporate/Commercial, SME & Individuals are provided in Annexure XVIII):

Step 1: Map the customers characteristics against the Rating Factors and allocate the appropriate score to each characteristic. Step 2: Make a sum total of all marked characteristics.

Step 3: Map the sum total of all factors to arrive at final ORR of the customer.

3.4.1.2 Level of Risk

ORR 1 - This highest rating is reserved for government institutions and a handful of multinational and large institutional customers. Customers with this rating should have unusually solid and stable profitability, liquidity, and debt coverage in the past and are projected to continue this performance over the long term.

ORR 2 - Strong corporate/institutional customers, government institutions, or multinationals with somewhat greater long term risk than Rating 1 customers, but still supported by very stable operating and financial performance. Taking into account their activities, ongoing viability, profitability, liquidity, solvency, and capacity to repay, customers with this rating carry a very small degree of risk due to their notable stature, stability, and longevity

ORR 3 - Customers demonstrate medium to long term operational and financial stability but they may be somewhat more susceptible to cyclical trends or variability in earnings. Their operating cash flow projections over the medium to long term adequately cover both projected principal repayments and interest.

ORR 4 - Customers portray operational and financial stability over a three to five year time horizon, but are more likely to be weakened by adverse business, financial or economic conditions than customers with stronger ratings.

ORR 5 - Customers are reasonably sound and have some margin of protection in their current performance, but may portray more erratic patterns as a result of competitive or general economic pressures. Recent profits and operating cash flows provide moderate comfort, and therefore interest and principal repayments are less well assured over a medium to long term time horizon

ORR 6 - These customers face more uncertainty over future operating cash flows, and are often under stronger competitive pressure. Their future over the next three to five years, in both good and bad times, is less well safeguarded by operational and financial performance, with smaller margins of protection on principal repayments and interest.

ORR 7-This category is termed as Watchlist. Customers have greater vulnerability to default. While current projections show that they are able to support principal repayments and interest, capacity or willingness to repay is likely to be impaired by adverse business, financials or economic conditions.

These customers often show more erratic performance, and may have experienced recent loss years. They may be perceived as fighting to maintain current levels of profitability.

Customers which are watchlisted due to subjective or above factors and have delayed payments by 16 to 29 days will fall in this category.

ORR 8 - This category is termed as Serious Watchlist. Customers have high vulnerability to default. Current dealings reflect delay in interest payments. Future payments might depend on continuity of positive prospects of the industry.

These customers often show more inconsistent performance in terms of profit margins and mark-up payments in recent times.Customers which are wathclisted due to subjective or above factors and have delayed payments by 30 to 59 days will fall in this category.

ORR 9 - This category is also termed as Severe Watchlist. Customers with high probability of default fall under this category. Current financial position of the customers is weak. Even positive development of the business, financial and economic conditions might not ensure its capability to meet its financial obligations.

Customers with delayed payments by 60 to 89 days might fall in this category.

ORR 10 - These customers clearly exhibit weaknesses, and depend on favorable economic conditions to meet financial commitments. They have been experiencing difficulties, which may threaten the safety of lending. Returning the business to sustainable health without important changes in strategies or practices is difficult. If it is highly likely that a breach of repayment arrangements will occur within a period of three months, the requirements of ORR11 and 12 are to be strictly observed. Customers under the Substandard category as defined under the SBPs Prudential Regulations (i.e. where mark-up/interest or principal is overdue by 90 days or more from the due date) would also fall under this risk rating.

ORR 11 - Customers with Credit Rating 11 are of very poor standing with little prospect for improvement. Principal recovery will require rigorous remedial management. Customers under the Doubtful category as defined under the SBPs Prudential Regulations (i.e. where mark-up/interest or principal is overdue by 180 days or more from the due date) would also fall under this risk rating.

ORR 12 - This risk rating clearly recognizes and measures assets impaired due to loss of principal (which may be partial) as well as mark-up, thus justifying the provisioning for the same. Customers under the Loss category as defined under the SBPs Prudential Regulations (i.e. where mark-up/interest or principal is overdue by one year or more from the due date) would also fall under this risk rating or trade bills (import/export) bills or inland bills are not paid/adjusted within 180 days of the due date.For International Credits classification policy defined in Credit Policy International shall be followed.

3.4.1.3 Risk Rating vs. Classification

Risk RatingCategory Classification

1-6Current

7Watchlist

8Serious Watchlist

9Severe Watchlist

10Substandard

11Doubtful

12Loss

3.4.1.4 Frequency of Reporting

CRM or CC must reassess the ORR whenever a review event (frequent overdues, deferrals, material adverse change in the company or industry) occurs, and if appropriate, the ORR must be revised/downgraded. The outcome of the review, including details of major issues to resolve, should be recorded. Further, ORR should be downgraded if the deferrals are outstanding for more than 1 year

Where there is a downward movement in an ORR, the relevant Business Unit and Risk Manager will determine the required course of action, which may include issues to be addressed with the customer.

Under normal circumstances, the following maximum review periods will apply for ORR:

ORRRating Review Frequency

1Annually

2Annually

3Annually

4Annually

5Annually

6Annually

7Semi-Annually

8Semi-Annually

9Semi-Annually

10Semi-Annually

11Semi-Annually

12Annually

3.5 Security Classes (Annexure XII)

The following security classes have been identified which would be subject to review with the changing market dynamics:

Class I:

Deposit (Rupee/FCY) with UBL US$ Bonds, Federal Investment Bond, Treasury Bill, National Saving Certificate, discharged and under lien, and Government guarantee

Class II:

Certificate Of Investment, Deposit, guarantee of A rated FIRMU Approved - Global Banks

Class III:

Certificate Of Investment, Deposit, guarantee of FIRMU Approved - local Banks (Or other than class II)

Class IV:

Certificate Of Investment, Deposit, guarantee of FIRMU Approved - DFIs/NBFCs Shares/TFCs/Certificates of Mutual Fund NIT Units

Class V:

Token/Registered Mortgage Pledge of goods financed by UBL Lien on import documents under Sight LCs.

Class VI:

Equitable Mortgage Hypothecation of stocks and receivables Hypothecation over plant and machinery Others (Trust Receipts etc.)

(3RD party security would be reflected by adding a prefix 'T')

Security classes should be mentioned in SCA.

A risk-scoring model is prepared which would generate risk weighted exposure limits (Annexure XII) as a product of facility amount and security weight. The proposed criteria would be applicable to both Simplified and Standard Credit Applications. The RM would be responsible for matching facilities with their respective security classes and determining the weighted risk score. RCAD would then be responsible to route the SCA to the relevant CC based on the risk weighted score instead of the proposed exposure amount.

For example, in Appendix B of Annexure XII, the risk weighted exposure amount comes to Rs. 476Mn whereas the exposure proposed is of Rs. 700Mn. With this method the CC for the risk weighted approval level covering Rs. 476Mn will be chosen by the RCAD for routing SCA, and not the CC for Rs. 700Mn.

MIS would be developed to reflect all security fields for necessary reporting and monitoring.

3.6 Facility Risk Rating Model (FRR)

In line with efficient risk management practice, FRR Model has been formulated for implementation. FRR comprises of two components; risk associated with the type of collateral and facility itself. The model (Annexure XIX A) has been devised to meet various types of transactions comprising of single facility to multiple facility structure. Usually customers avail multiple facilities, this model also enables us to calculate facility wise FRR as well as aggregate FRR of the customer.

The purpose of this model is to outline a criterion that truly reflects expected loss of exposure after default of each facility as well as of aggregate facilities. It is aimed to have lending risks properly identified to aid risk approving process and reflect true credit quality. Calculation methodology for FRR Model is defined in Annexure XIX.

CHAPTER 4

CREDIT APPROVAL

The credit approval requires a framework within which a reviewer can judge the quality of credit proposed. All Credit Officers should make themselves thoroughly familiar with the credit process, industry dynamics etc.

4.1 Expected Attributes of Risk Managers/Senior Risk Managers

The Risk Managers must have sound capabilities including:

Adequate knowledge of credit analysis, negotiation, structuring and maintenance, The ability to communicate clearly, in speech and in writing, Sound knowledge of banks Credit Policy, Credit Manual and the ability to apply this knowledge to specific situations, Integrity, honesty, sound judgment, common sense, and attention to detail, The ability to think and act independently and The sense to know when to ask for guidance from more experienced officers. Clearance on any external exams/certifications as required by the Bank from time to time (e.g.; OMEGA)

In addition to the above mentioned capabilities, Senior Risk Managers are required to have:

Diverse experience in corporate and commercial lending Appropriate credit training Exposure to more than one geographic or business areas Remedial management or workout experience and An acceptable track record with respect to the performance of portfolios under his/her responsibility.

They must also have a wide range of capabilities such as;

Advanced knowledge of banks credit culture, policy, procedures and the ability to interpret and apply this knowledge to specific situations Sensitivity to portfolio management strategies Understanding of the business cycle and its effects on the portfolio and individual credits Ability to identify current risks and to anticipate potential risks Negotiating ability, especially in difficult or troubled credits Ability to work with customers, other banks, lawyers, etc. Ability to consult and work with seniors, and subordinates in a team approach to any situation Ability to work under pressure and maintain a detached, independent perspective Ability to apply knowledge and experience to actual credit situations and to communicate assessments and opinions clearly and directly in speech and in writing Ability to give strict attention to details. Ability to coach and groom juniors and to show a commitment to their credit training Balanced and independent judgment, with the ability to assess each credit proposal on its merit, and to approve only when satisfied with all aspects of the credit Decisiveness, including the ability to make unpopular decisions a reasonable sense of when to say Yes and when to say No.

4.2 Appointment of Global Relationship Manager

There are some large business groups which spread their business operation in various countries, business relationship groups. For these Customers, GE-CBG/RB/International/GH-Islamic Banking will appoint Global Relationship Manager (GRM) based on the following factors:

Accessibility Strength of the relationship Complexity of relationship Amount of facilities extended

If there are disputes in assigning the GRM between business Groups, Head-CP will finally decide the appointment of GRM.

4.2.1 Responsibility of Global Relationship Manager

To manage issues pertaining to all group accounts at various locations, deal with NPL management and account monitoring. SCA of the group will require GRMs input and signature in addition to respective RM(s).

SCA of all companies in the Group should be routed in one package if possible. However, due to multiple geographies and different financial year end sates of the Group companies, the SCA (interim or annual) for individual company can be routed independently. In such cases, a copy of last approved Group SCA should be attached; however sign off of GRM is essential.

4.3 Credit Approval Structure

Detailed Credit Approval Structure is defined in Annexure XX.

4.4 Markup parameters

RM should clearly write the frequency of mark-up collection from customer in the Facility Appendix. Credit Committee is required to approve the proposed frequency under following guidelines:

1) All long term loans should have quarterly mark-up payment frequency linked with 3 month KIBOR. In case higher frequency is proposed specific CC approval is required. 2) All short term facilities should have mark-up payment frequency by customer linked with the tenor of KIBOR (for example, for 1 month KIBOR, monthly payment of mark-up). Deviation will require specific CC approval.3) All money market lines/deals should have repayment of Principal and mark-up paid simultaneously by the customer at the maturity. Any exception will require Head CRM approval.

4.5 Credit Approval Process

Credit proposals may be approved or declined by the approving authorities as per their discretion. In order to streamline the approval process, final approving authorities are required to justify the decisions taken in cases of approval/decline as per following guidelines:

Approval

In case the credit proposed for annual review/interim review/NOC/Waiver/deviations/etc. is approved, the approving authority signing last as per the Credit Approval Authority Matrix other than Head CRM and above will be required to provide comments on key aspects defined below:

Industry Characteristics favorable for the customer; Obligors key risks; financial or nonfinancial; Key risks and factors from which comfort is taken; and Aspects to be monitored closely post approval etc.

These comments will form an integral part of SCA for further decision making.

Approved credits may be sent to BRMC/BOD for review as per the attached format (Annexure XXI)

Decline

In case the credit is declined the authority signing last will provide the decline memo while sending SCA/Credit Memo back to RCAD. Memo shall contain comments on:

Industry Characteristics unfavorable for the customer; Obligors key risks which cannot be mitigated; financial or nonfinancial; Aspects to be monitored closely post approval; and Any other detrimental factor.

RCAD will route such decline memo along with the declined proposal to Head CRM directly for review.

Expired Credits:

Any facility or credit, which is renewed by CC or its extension is in place, is not an expired credit. The fresh security and control documentation may take time but such facilities are not to be taken under the head of expired credits.

Under this circumstances where credit has been reviewed and approved by the CC, RCAD will issue conditional DAC, with the memo to the respective branch, highlighting the exception and advising that debit shall not be renewed without prior approval from RCAD. For this, only the expiry of the credit must be changed and the new expiry of the approval is to be inserted in the system and debit of limits shall remain blocked. After completion of all necessary documentation etc. for clearing the exception, RCAD will issue a complete DAC after which proper debit operations will be effective.

While RCADs will provide MIS of credits which are expired and will be expiring in the coming months, it is joint responsibility of Business and CRM to have expired credits at low levels, all the time.

4.6 Unusual Risks

Credit transactions representing unusual risks shall be treated as exceptions to the Policy. A few examples of exceptions are:

1. Credit transactions with tenor longer than the stipulated period as per policy;2. Term Loans having: Bullet payment at maturity (loans exceeding one year tenor) Grace period in excess of 2 years;3. Lending for the purpose of providing equity to a business;4. Issuance of open-ended guarantees and/or guarantees which may be extendible at the sole option of the beneficiary and guarantees with auto-renewal clause (ARC); and5. Concentration of collateral with limited marketability.

Approval level:

a, b and c GE- R&CP d and e one level higher than relevant CC.

Guarantees with ARC favoring Government and Government owned entities and top tier multinationals at Overseas Centres shall be approved by relevant CC.

4.7 Politically Exposed Entities

All politically sensitive credits (fresh and renewals) as well as credits linked with persons holding public offices shall be approved by GE-R&CP in addition to relevant CC including Senior Risk Manager and Head CRM.

4.8 Revaluation

RCAD will submit a monthly report of credits booked (funded + non-funded) in foreign currency to business and CRM showing the impact of exchange fluctuation i.e. customers liability at prevailing exchange rate and the exchange rate at the time of booking foreign currency loans.

If the depreciation of PKR is more than 5% from the booked rate of the loan, RM will ask the customer to reduce his/her liability proportionately. An undertaking to cover exchange fluctuations shall be obtained from the customer at the time of initiation.

Such loans, where the exchange rate has depreciated more than 5% and the liability is not reduced by the customer promptly, will be watchlisted. Subsequently, business shall submit a resolution plan after agreeing with the customer in 30days.

Overdue

It has been observed that TPC continues to issue LCs upto the limit approved in cases where the import bills have been overdue for considerable period. This is against the true spirit of due diligence to be conducted while lending to customers. Inability of the customer to pay for current dues signals that the customers cash cycle is disturbed and would face problems for further repayment of the loan. Additional lending to such customers might lead to deterioration of the portfolio. Hence forth such cases will require additional approval (as specified in Annexure XXII) for continuation of issuance of LCs, FTRs and FIM (sub limits) for overdue accounts within the approved limits.

CHAPTER 5

DOCUMENTATION AND DISBURSEMENT

The disbursement of funds against any facility does not take place unless the requirements pertaining to credit have been met. The responsibilities and guidelines for completion and perfection of documentation along with minimum document requirements are defined below.

5.1 Documentation Responsibilities

Prior to issuance of Disbursement authorization Certificate (DAC) and on receipt of approved SCA, RCAD will ensure the following:

Routing number allotted to SCA to be logged off from routing register, routing sheet to be filed (for LOS, this is system generated), and copy of SCA to be provided to Documentation Officer in order to check/record credit approval and CCs covenants, if any; A copy of Credit Approval forwarded to MIS Officer for updating of database; Upon written request from RM, RCAD to prepare IB documents, as per credit approval, completely filled in, including date of execution, principal amount, rate of markup, frequency of markup for each facility, expiry of IB Agreement, details of collateral etc.; Signature of the customer shall not be obtained on blank documents; Provide copy of approval to RM, along with completed set of IB and related documents; Independently nominate/assign external vendor (Mucaddam, valuer, etc.) for provision of various reports. Review and identify the discrepancies in the reports for rectification by the vendor. All mucaddam and valuer vendors to be spread over equally for customers; Nominate approved legal counsel for review/vetting of legal documents (NonStandard); Review legal opinion provided by the legal counsel and draft of agreements, undertaking, or any other legal and property document etc; RM will be responsible for providing complete/executed legal documents as per requirement of approved legal counsel; Documents must be executed in the presence of RM(s)/bank officer(s)-attorney holders; and RCAD will ensure that any outstanding discrepancies/issues related to the approval/legal opinion, BRR/Audit/Valuation Report, etc. are advised to RM in one complete report/memo. However, if RM provides RCAD with documents on piece-meal basis discrepancies shall be pointed out in piece-meal.

After careful review of credit documents, external reports, legal opinions, RCAD will:

Issue DAC only after resolution of all outstanding issues/discrepancies or if valid deferrals are in place; Provide copy of DAC to MIS Officer for scanning of complete package (i.e. SCA + Approval + IB Doccuments + Legal + External Reports) in Electronic Document Management System (EDMS); Provide copy of DAC to Processing Officer for feeding of Limit details, type, tenor, rate of mark-up, expiry, etc. in core banking system (CBS). All entries to be duly authorized/supervised by RCAD Head; and Provide scanned copy of DAC to Operations via email or hard copy through fax or mail (courier).

5.2 Documentation

5.2.1 General

1. It will be the responsibility of RMs to ensure that complete and legally enforceable documentation is obtained as required for each credit transaction/facility;2. All documents intended as security or support for credit facilities must be selected and reviewed by Banks approved legal counsel conforming to the transaction/facility, adequate coverage of the risks involved, completeness, proper execution, and registration, if required. In case of renewal of facilities against the same arrangements where documents are already vetted by the legal counsel, fresh opinion will not be required;

3. The security/support documentation should be executed by the borrower as follows:

a. In case of individual, sole proprietorship and partnership, documents must be signed by the owners. Bank will not accept any delegation of power for the signing of credit documents. b. In case of limited liability companies, credit documents will be signed by authorized person(s) of the company/trustee or any other statutory body as per Board Resolution or any Act delegating such powers.

4. In the case of evidencing a lien on specific property/assets, it will be the responsibility of RM and RCAD to verify the actual existence by conducting joint visit of the property/asset;

In case of pledge of shares, Banks lien should be recorded through CDC and letter of lien (shares) should be obtained duly signed by the owner of shares.

In the case of residential/commercial/industrial property, Bank may get one of the following types of title documents;

a) Sale Deed, GIFT (HIBA) Deed/Exchange Deed etc.ORb) If the title has been originated from the Revenue Record Department then:

Copy of register HaqDaranZameen/Jamanbandi issued by the relevant Halqa Patwari. Copy of Mutation (NAQAL INTEQAL) issued by the relevant Halqa Patwari. AQS SHIJRA (Site Map of the property).ORc) In case of land located in Societies/Schemes. Allotment letter/Transfer letterORd) Permanent Transfer Deed (PTD) issued by the Settlement Department in respect of evacuees properties. Certificate from the relevant Halqa Patwari that this PTD has been incorporated in the revenue record.ORe) Proclamation Decree issued by the Court of Law.ORf) Partition Deed duly executed in the Court of Law along with extract from the relevant ownership record.

Following additional documents relating to the Title Deed must also be obtained:

Approved copy of the map; Non-encumbrance certificate; Valuation certificate from a Banks approved surveyor; Extract from City Survey Department (PT-1) or Excise department if no record of ownership is available with any other department; and NOC/permission to create mortgage, in case of lease hold property.

N.B. Factum of mortgage is required to be entered in the relevant rev