GOVERNMENT OF PAKISTAN
Securities and Exchange Commission of Pakistan -.-.-.- Islamabad, the 29th March, 2021

NOTIFICATION

S.R.O. 370 (I)/2021.- The following draft amendments to the Non-Banking Finance Companies and Notified Entities Regulations, 2008, proposed to be made by the Securities and Exchange Commission of Pakistan, in exercise of the powers conferred by sub-section (2) of section 282B of the Companies Ordinance, 1984 (XLVII) of 1984, are hereby published for information of all persons likely to be affected thereby and notice is hereby given that comments, if any, received within fourteen days of the date of this notification will be taken into consideration, namely:-

DRAFT AMENDMENTS

In the aforesaid Regulations,

(1) in Part III, after regulation 29, the following new Part III A and regulations shall be added, namely:-

“PART III A Additional Requirements for NBMFC’s

29A. Application of this Part. - The provisions of this part shall apply to Non-Bank Micro Finance Companies and are in addition to other applicable requirements under these regulations.

29B. Risk Management - A Non-Bank Micro Finance Companies shall, -

(a) devise and implement a comprehensive risk management framework duly approved by its board to identify, assess, and prioritize risks, develop strategies to measure risk, design operational policies and procedures to mitigate risk, implement and assign responsibilities, test effectiveness, evaluate results and revise policies and procedures, where required;

(b) ensure that the risk management framework comprehensively covers all risks, including credit, operational and market risks, to which the company is exposed and encompasses the scope of risks to be managed, determine risk tolerance limits and have flexibility to accommodate any change in business activities;

(c) design risk management tools and approaches that respond to their specific clients, lending methodologies, operating environments, and financial and social performance objectives; and

(d) develop contingency plans duly approved by its board to effectively deal with stress situations. Contingency plans shall be regularly reviewed to ensure those

are relevant and effective.

29C. Funding and Liquidity Management - (1) A Non-Bank Micro Finance Company shall formulate and implement a comprehensive funding and liquidity management policy duly approved by its board to ensure that it has funding from well-diversified sources without excessive reliance on any single source for its sustainability and meeting social and performance objectives.

(2) The Non-Bank Micro Finance Company shall ensure that, -

(a) its funding sources are well diversified including equity, sponsors’/donors’ funding, subordinated loans, commercial finance, debt instruments issued through capital markets and other sources;

(b) its funding mix has a good balance of short term, medium term and long-term funds in line with the overall funding policy;

(c) its short-term borrowings (that have repayment due within one year), including subordinated debt, as a percentage of total borrowings are not more than the following limits:

Debt to Equity Ratio	Short Term Borrowing as % of Total Borrowing
Less than 2 times	60%
Between 2 to 3 times	50%
Higher than 3 and up to 4 times	40%
More than 4 times	30%

(d) its borrowing including subordinated debt from a single source as a percentage of total assets is not more than the following limits:

Debt to Equity Ratio	Borrowing from a single source as % of Total Assets
Less than 2 times	65%
2 to 3 times	60%
Higher than 3 and up to 4 times	55%
More than 4 times	50%

(e) it maintains adequate minimum liquidity cushion for business as usual, as well as for stress situations, and the liquidity plans include simple stress scenarios taking into account contagion effects that may manifest in a rapid deterioration of the loan portfolio due to localized problems.

(f) it has sufficient arrangement of undrawn overdraft facilities only for bridging the temporary gaps, if any, in financing requirements, while ensuring that for regular funding needs it does not overly rely on overdraft or credit lines likely to be withdrawn by the lenders in case of any adverse situations;

(g) where exposed to foreign exchange risk, it undertakes separate analysis for

each currency individually and, where appropriate, sets and regularly reviews limits on the size of its cash flow mismatches for foreign currencies in the aggregate and for each significant individual currency;

(h) it carries out matching and forecasting of assets and liabilities for a period of 12 to 15 months to ensure that liabilities remain less then assets at all time;

(i) forward looking debt management is carried out by preparing projected cash flow statement for at least 24 months on a moving average basis to fill up any projected cash shortfall by arranging additional funds while complying with overall fund management policy and regulatory requirements; and

(j) for finance and credit lines that are maturing and need to be renewed, the loan renewal process should start well in advance before the maturity dates, to ensure availability of adequate fund.

Provided that the Non-Bank Micro Finance Companies, which are non-compliant with clause (c) and (d) above, shall ensure compliance within a year from the date these requirements come into effect.

(3) A Non-Bank Micro Finance Company shall create a special reserve fund wherein at least 5% of its after-tax profits shall be credited and the special reserve fund shall be separately disclosed in the statement of financial position as part of the equity.

(4) Maintenance of Capital Adequacy Ratio (‘CAR’).- An Non-Bank Micro Finance Company shall be required to maintain the Capital Adequacy Ratio, as per the criteria given in Schedule IXA, according to the below timeline:-

Sr. #	Type of NBFC	Minimum CAR
1.	By June 30, 2021	12%
2.	By June 30, 2022	13.5%
3.	By June 30, 2023 and beyond	15%

29D. Credit Underwriting Standards - (1) A Non-Bank Micro Finance Company’s board shall establish and oversee a loan underwriting policy aligned with its risk governance framework, its risk tolerances and limits, and its overall risk appetite and strategy, and shall be reviewed by the board periodically. The board shall seek periodical reporting from the company’s oversight functions to properly monitor and evaluate effectiveness of lending policies and procedures, risks, and to ensure that individual transactions comply with the underwriting policy and the risk tolerances.

(2) A Non-Bank Micro Finance Company shall have written manuals and policies with regard to the screening, approval, monitoring and collection of loans. The manuals and policies shall be devised taking into account the special characteristics of its lending methodology.

(3) In addition to compliance with regulation 9, an Non-Bank Micro Finance Company shall,-

(a) develop comprehensive Know Your Customer and Customer Due Diligence policies duly approved by the board and shall be communicated down the line to relevant staff. The policy shall define high risk factors which may include the description of customers, products, transaction channels and geographic distribution.

(b) deploy systems, controls and take all reasonable measures to identify the identity of existing and prospective customers and to confirm that the customer is not exploiting microfinance channel for any unlawful activity.

(c) develop and implement Anti Money Laundering /Counter Financing of Terrorism policies and procedures in line with SECP’s regulations, directions and guidelines and ensure meticulous compliance of the same.

(d) perform due diligence to evaluate borrowers’ willingness and repayment capacity to adequately service their debt obligations, including consideration of credit history and performance on past and existing obligations.

(e) develop income verification procedures of borrowers and shall ensure that the total instalment of the credit extended by it commensurate with monthly income and repayment capacity of the borrower.

(f) verify the borrower’s income including substantiation of the borrower’s employment status and income history. The borrower’s underlying income shall be verified through a reliable and documented source, and reliable and documented income history. This includes:

o verification through independent means from a source that is difficult to falsify;

o documentation that does not contradict other information provided during the underwriting process; and

o documentation that matches the amount of income used by the NBMFC in its assessment of the borrower’s debt service capacity.

(g) appropriately value the inconsistent incomes and, if necessary, suitably discount it. In case of borrowers who are self-employed or who have irregular sources of income, additional due diligence through third-party verification of historical income should be carried out. For rental income, documentation shall be collected to substantiate income, such as a lease/rent agreement, rent receipts or tax assessment.

(h) assign due weightage to the Credit Information Bureau report in addition to their approved criteria while undertaking credit appraisal of the prospective borrower. The CIB report should not be the sole assessment tool used to determine reliability as it indicates past, not future behavior, or the borrower’s current financial condition

(i) establish minimum requirements of information and analysis upon which

lending decisions are made and shall ensure that the documents, data or information collected under customer due diligence process is kept up-todate to ensure traceability of the borrowers.

(j) in the case of secured lending set forth procedures for collateral evaluation and lien perfection documents.

(k) develop an internal mechanism to monitor the overall exposure of their borrowers to manage credit risk and minimize the risk of borrowers’ over indebtedness. At the time of granting loan, it shall obtain a written declaration on the prescribed format from the borrower disclosing details of various facilities already obtained from other microfinance banks, microfinance institutions, banks and other financial institutions and shall ensure that total exposure of their clients does not exceed their total repayment capacity as determined under the criteria laid-out in the credit policy.

(l) The loan portfolio shall be diversified keeping into consideration, products, geographic and sectoral distribution.

(4) A Non-Bank Micro Finance Company shall have a clear policy for large loan sizes, as may be determined by its Board and shall deploy a more stringent criteria, duly approved by its board, to establish an appropriate valuation methodology and require sufficient documentation to support the collateral valuation, where applicable. A post-screening process shall be in place and shall be used in conjunction with prescreened process to identify potentially bad loans for effectively managing those.

29E. Code of Corporate Governance. - A Non-Bank Micro Finance Company shall comply with the requirements of the Code of Corporate Governance, as specified in Schedule XIII.”; and

(2) after Schedule –XII, the following new Schedule-XIIA shall be added, namely:-

“Schedule- XIIA Code of Corporate Governance for Non-Bank Micro Finance Companies see Regulation 29E

[These requirements are in addition to any other applicable requirements regarding directors, CEO, composition of board etc.]

Independent and Non-Executive Directors	Mandatory
1. The independent directors of a Non-bank Microfinance Company (NBMFC) shall not be less than two members or one third of the total members of the board, whichever is higher. [To be complied with by NBMFCs latest by the date of next election of directors becoming due after date of notification of the amendments to the Regulations]

Conflict of Interest	Mandatory
2. A director and chief executive of an NBMFC shall not be a director, consultant, advisor or an employee of any other NBMFC or institution engaged in a similar business in Pakistan.
3. The board of an NBMFC shall disclose to stakeholders, how many family members are sitting on the board, key positions held and any other such potential conflicting interests in the organization.
4. The board of an NBMFC shall develop policy to prevent conflict of interest in their capacity as members of the board as well as for senior management and other employees as approved by the board. The conflict-of-interest policy should be reviewed at least annually. An NBMFC shall put in place a formal code of conduct that promotes ethical culture in the company.
Women Director	Mandatory
5. While NBMFCs are encouraged to have more female representation on their board, the board shall have at least one female director.
Orientation and Training	Voluntary
6. All Directors should receive orientation on the operations of the NBMFC and training on their fiduciary roles, responsibilities and liabilities as board members.
7. Board development sessions should be conducted at least once a year with a certificate awarded to the participants.
Board Meetings	Mandatory
8. Board shall hold regular meetings; at least once in every quarter of a year and more frequently, where required.
9. In order to strengthen and formalize decision-making process, significant issues shall be placed for the information, consideration and decision of the board of directors and/or its committees. List of significant issues is attached as Appendix-A.
Board Level Committees	Mandatory
10. NBMFCs shall establish Audit Committee, comprising at least three non-executive directors. The chairperson of the committee shall be an independent director, who shall not be the chairperson of the board. Preferably at least two members having relevant financial/banking expertise and experience must be part of the audit committee. The audit committee of the NBMFC shall meet at least once every quarter of the financial year. A meeting of the audit committee shall also be held, if requested by the external auditors, head of internal audit or by chairman of the audit committee. The board of every company shall determine the terms of reference of the audit committee.
11. There shall be a Human Resource and Remuneration (HR&R) Committee at least three members comprising a majority of non-executive directors. The CEO may be included as a member of the committee but not as the chairperson of committee. The CEO, if member of HR&R

Committee, shall not participate in the proceedings of the committee on matters that directly relate to his/her performance and compensation. The committee shall meet at least once in a financial year and may meet more often if requested by a member of the board, or committee itself or the chief executive officer and the head of human resource or any other person appointed by the board may act as the secretary of the committee. The terms of reference of committee shall be determined by the board.

12. There shall also be Risk Management Committee of the board constituted to supervise overall risk management functions of the institution. It will decide the policy and strategy for integrated risk management containing various risk exposures of the institutions. The Committee would review policies and guidelines for identification, measurement, monitoring and control for all major risk categories. The Board shall determine terms of reference of the Risk Management Committee.

Mandatory

Internal Audit

13. There shall be an internal audit function in every NBMFC. The NBMFC shall ensure that head of internal audit is suitably qualified, experienced and conversant with the company's policies and procedures. The head of internal audit shall functionally report to the audit committee and administratively to the chief executive officer and his performance appraisal shall be done jointly by the chairman of the audit committee and the chief executive officer.

14. No director on the Board, shall be appointed, in any capacity, in the internal audit function of the company. The Board shall ensure that the internal audit team comprises experts of relevant disciplines in order to cover all major heads of accounts maintained by the NBMFC.

15. The internal audit function, wholly or partially, may be outsourced by the NBMFC to a professional services firm or be performed by the internal audit staff of holding company and in lieu of outsourcing, the NBMFC shall appoint or designate a fulltime employee other than chief financial officer, as head of internal audit holding suitable qualification, to act as coordinator between firm providing internal audit services and the board.

16. While outsourcing the function, the NBMFC shall not appoint its existing external auditors or any of its associated company or associated undertaking, as internal auditors.

17. NBMFCs shall ensure that internal audit reports are provided for the review of external auditors. The auditors shall discuss any major findings in relation to the reports with the audit committee, which shall report matters of significance to the board.

Mandatory

External Auditor

18. An NBMFC shall appoint as external auditors, a firm of auditors, which

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has been given a satisfactory rating under the Quality Control Review program of the Institute of Chartered Accountants of Pakistan and registered with Audit Oversight Board of Pakistan under section 36I of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997).
19. An NBMFC shall not appoint as external auditors, a firm of auditors,
which or a partner of which is non-compliant with the International Federation of Accountants' Guidelines on Code of Ethics, as adopted by the Institute of Chartered Accountants of Pakistan.
20. No NBMFC shall appoint its external auditors to provide services in
addition to audit except in accordance with the applicable laws or any other regulatory requirement and shall require the auditors to observe and confirm compliance with the applicable International Federation of Accountants guidelines in this regard.
21. An NBMFC shall ensure that the auditors do not perform management
functions or make management decisions, responsibility for which remains with the Board and management of the company.
22. No NBMFC shall appoint a person as an external auditor who is a close
relative (spouse, parents, dependents and non-dependent children) of the chief executive officer, the chief financial officer, the head of internal audit, the company secretary or a director of the NBMFC. It shall also be ensured that no person involved in the audit of the NBMFC is a close relative of these office holders of the NBMFC.
23. A NBMFC shall require the external auditors to furnish a management
letter to its board and any matter deemed significant by the external auditor shall be communicated in writing to the board prior to the approval of the audited accounts / financial statements by the board.
24. An NBMFC shall change its external auditors every five years.
Mandatory
Related Party
25. The details of all related party transactions shall be placed periodically
before the Audit Committee of the company and upon recommendations of the audit committee the same shall be placed before the board for review and approval.
Mandatory
Appendix-A to Schedule XIIA
Significant issues to be placed for decision/discussion of Board of Directors may include but not limited to the following:
i. Annual business plan, cash flow projections, forecasts and strategic plan;
ii. Budgets including capital, manpower and overhead budgets, along with
variance analyses;
iii. Matters recommended and/or reported by the committees of the board;
iv. Update on the conflict of interest policy and issues arisen in relation thereof;

v. Quarterly operating results of the organization as a whole and in terms of its operating divisions or business segments;

vi. Internal audit reports, including cases of fraud, bribery, corruption, or irregularities of a material nature, management letter issued by the external auditors;

vii. Policies or amendment to policies such as Credit Policy, Risk Management, Human Resource Management, Procurement of goods and services, Environment and Social Management etc., rule or regulation, enforcement of an accounting standard having material effect and such other matters as may have a material effect on the NBMFC;

viii. Status and implications of any law suit or proceedings of material nature, filed by or against the NBMFC;

ix. Any show cause, demand or prosecution notice received from revenue or regulatory authorities;

x. Failure to recover material amounts of loans, advances, and deposits made by NBMFC, if such a failure to recover for a single transaction or in aggregate has a material impact on the NBMFC;

xi. Any significant accidents, dangerous occurrences and instances of pollution and environmental problems involving the NBMFC;

xii. Significant public or product liability claims made or likely to be made against the NBMFC, including any adverse judgment or order made on the conduct of the NBMFC or of another organization that may have a material negative bearing on NBMFC.

xiii. Report on governance, risk management and compliance issues. Risks considered shall include reputational risk and shall address risk analysis, risk management and risk communication;

xiv. Review of specific Social Performance impact to analyse fulfillment of social targets and to ensure that social performance issues are identified as components of the NBMFC’s strategic and business plans.

xv. The CEO shall immediately bring before the board, as soon as it is foreseen that the organization will not be in a position of meeting its obligations on any loans (including penalties on late payments and other dues, to a creditor, bank or financial institution or default in payment of any liability) or any other debt instrument. Full details of the failure to meet obligations shall be provided in the NBMFC’s quarterly and annual financial statements.”.

[File No. SCD/NBFC/NBFCR/2021]