Please
refer to BPD Circular No.06 dated July 14, 2006, wherein
Banks/DFIs were advised to make proper disclosure of the
lending and deposit rates of all consumer products offered
by them including information of whether the rate is fixed
or floating, tenor of the benchmark (KIBOR or any other
rate plus a pre-defined spread) used and frequency of
re-pricing.
2.
It has been observed that some banks change the margin
over KIBOR during the tenor of the loan. Banks/DFIs have
to determine the margin over KIBOR at the outset of the
transaction; however, once the margin is agreed with the
customer, bank/DFIs should not increase it during the
tenor of the loan. In some cases, banks/DFIs include clause(s)
in the loan documentation which allow them to change the
margin anytime during the tenor of the loan. This practice
defeats the purpose of establishing a benchmark for pricing
a floating rate loan and is also against the instructions
issued vide above referred Circular.
3.
In order to ensure transparency in the pricing and documentation
of loans, the following instructions are being issued
for strict adherence by the banks/DFIs:
i)
Banks/DFIs shall clearly indicate in the loan documents
whether financing is on fixed rate or floating rate basis.
In case of fixed rate loans the rate shall not be increased
during the tenor of the loan.
ii)
In case of floating rate loans, Banks/DFIs will clearly
specify the margin over the benchmark (KIBOR or any other
rate). Also the Banks/DFIs will not increase the margin
during the tenor of the loan.
iii)
All banks/DFIs should clearly spell out the pricing (KIBOR
or any other benchmark rate plus a pre-defined margin
not changeable to the detriment of the borrower during
the term of credit) and the re-pricing frequency in their
loan documents. In case of re-pricing, the rate will change
only if there is a change in the benchmark rate (KIBOR/other
benchmark) over the tenor of the loan.
iv)
The loan agreement should not contain the clauses/stipulations
to change the rate unilaterally.
v)
All charges, other than mark-up, including fees/prepayment
penalties etc. to be recoverable by banks/DFIs should
be determined and clearly disclosed to the customers at
the time of entering into agreement. All such charges
shall be locked and their upfront full disclosure shall
be made and agreed with the customers in the loan agreement.
vi)
A complete amortization schedule should be provided to
the customer along with the facility offer letter showing
the break up of principal and mark up to be paid by the
customer over the life of the loan/finance or till the
next re-pricing date for fixed and floating rates respectively.
In case of resetting/revisiting the floating rates, a
new amortization schedule should be issued to all existing
customers informing them about the new rates on loan/finance
which should be determined in line with the benchmark
agreed at the time of lending.
vii)
As implementation of requirement at Para 3(vi) above may
require changes in the IT system, banks/DFIs should make
necessary arrangements for updating their IT systems within
a period of three months of issuance of this Circular
for issuing new amortization schedule on re-pricing of
loans to the existing customers. For new customers/borrowers
banks/DFIs shall implement this requirement immediately.
viii)
A statement showing outstanding position of principal
and markup should be issued to the customers on half yearly
basis or more frequently as per policy of the bank/DFI.
ix)
The loan and other documents obtained from the customers
should be duly filled in at the time of signing of the
loan agreement.
x)
Any negotiation with the customers for restructuring/rescheduling
of a loan/ facility should be done in writing and in a
transparent manner in accordance with the duly approved
policy of the bank/DFI.
4 . All banks/DFIs are advised to ensure strict compliance
of the above instructions in letter and spirit as non-compliance
will attract punitive action under Banking Companies Ordinance,
1962.
Please acknowledge receipt.