Circular No. 02 of 2020
The Presidents/Chief Executive Officers
All Banks/ DFIs/ MFBs
Dear Sir / Madam,
Basel Capital Adequacy Framework: Consideration of FCY Subordinated Debt from Foreign
Sponsors as Additional Tier 1 (ADT 1) Capital
Please refer to the instructions contained in BPRD Circular No. 06 of August 15, 2013 regarding Instructions for Basel III Implementation in Pakistan.
- In this regard, banks, DFIs and MFBs (banks) with majority foreign shareholding (Greater than 50%) may raise Additional Tier 1 capital in the form of Foreign Currency (FCY) subordinated debt/ loan from their existing foreign sponsors as per the following terms & conditions:
- FCY debt/ loan raised from foreign sponsors shall only qualify for meeting the applicable requirement of Capital Adequacy Ratio (CAR).
- The subject FCY debt/ loan shall not be considered for Minimum Paid up Capital Requirements (net of losses) – MCR, as applicable.
- The FCY subordinated debt/ loan shall be categorized as “Additional Tier 1 Capital” for CAR purposes.
- The terms & conditions of FCY subordinated debt/ loan shall be governed under the relevant sections and annexures (2 & 5) of BPRD Circular No. 06 of August 15, 2013, as amended by State Bank of Pakistan (SBP) from time to time. In essence, FCY subordinated debt/ loan shall comply with all the terms & conditions (including the lock-in clause and loss absorption clause etc.) as applicable on similar transaction(s)/ instrument(s) issued in local currency i.e. PKR.
- The FCY debt/ loan shall be subordinated to all other claims of the bank(s) except claim of common shareholders and the bank(s) shall formally execute the debt/ loan subordination formalities with their foreign sponsors.
- The admissibility of FCY subordinated debt/ loan, for CAR purposes, shall be subject to the limits as enforced through the applicable instructions.
- The subject FCY subordinated debt/ loan shall be extended by the foreign sponsors of bank(s) from outside Pakistan.
- Foreign sponsors of the bank(s) shall not borrow directly or indirectly from local financial institutions in Pakistan or from any overseas branch or subsidiary of Pakistani bank(s) to generate funds for the subject FCY subordinated debt/ loan.
- The amount of subject FCY subordinated debt/ loan, so raised by the bank(s), shall remain deposited with SBP and it shall not be withdrawn without prior approval of SBP.
- The bank(s), with prior approval of SBP, may return the amount of FCY debt/ loan (through exercising the Call Option) to their foreign sponsors after five years from its receipt within SBP. However, the bank(s) shall not be able to exercise the call option unless the called amount of FCY debt/ loan is replaced with the capital of same or better quality.
- SBP will pay return @ “One (1) Year USD LIBOR minus 50 bps” to the concerned bank(s), on the deposited amount of FCY subordinated debt/ loan with SBP. This rate of return may be reviewed by SBP, as and when deemed appropriate.
- For accounting purposes, bank(s) may record the PKR equivalent amount of FCY subordinated debt/ loan from foreign sponsors on the “Liability” side whereas on the “Assets” side, the same may be reflected as deposits with SBP. For revaluation purposes, daily Mark-to-Market (MtM) exchange rates are available at SBP website.
- FCY subordinated debt/ loan raised from foreign sponsors shall be outside the limits on foreign currency borrowings as applicable on these bank(s) through FE rules.
- Bank(s), desiring to raise FCY debt/ loan from their foreign sponsors, would be required to secure SBP’s prior approval, in this regard.
- Please acknowledge receipt.
(Muhammad Akhtar Javed)