Financial Risk Manager

Ways of Financial and Risk Management

Commercial Banks can make Investment in Commercial Papers
Monday, May 4, 2009

SBP vide cirular BPD # 28 - 2003 allowed the banks/DFIs to invest in only those CPs:

Which have been issued in pursuance of SECP’s guidelines for the issue of Commercial Paper and meet all the requirements laid down by State Bank of Pakistan.
Where the equity of the issuer is not less than Rs. 100 million.
Where the current and debt-equity ratios of the issuer do not fall below 1:1 and 60:40. For this purpose, the numbers of the last audited accounts of the issuer will be applicable.
Where the issuer does not have any overdue or default as evidenced by a report received from Credit Information Bureau of State Bank of Pakistan. The CIB report obtained by the bank/DFI for this purpose should not be more than two months old.
Where the current credit rating of the issuer, rated by a credit rating agency approved by State Bank of Pakistan, should not be below “A-“ (long term) and “A2” (short term).
Where the IPA is either a scheduled commercial bank, DFI or an investment bank with a minimum credit rating of A- (long term) and A2 (short term) from a credit rating agency approved by State Bank of Pakistan.
Where the total borrowings of the issuer by way of CPs do not exceed its equity (paid up capital and reserves).
The banks/DFIs investing in CP shall ensure that their total exposure, including investment in commercial papers, at all time remains within the per party exposure limit prescribed under Prudential Regulations.
The bank/DFI’s investment in CPs of an issuer shall not exceed 10% of the equity (paid-up capital and reserves) of the bank/DFI.
The bank/DFI’s investment in a single issue of CP shall not exceed 25% of the size of the issue. In case a bank/DFI intends to take up the whole issue or invest more than the limit of 25%, at the time of issue of CP, for subsequent sell down in the market, it shall be required to dispose off the CPs in excess of above limit in the following manner:
a) Within 20 days where tenure of CP is 90 days or more
b) Within 15 days where tenure of CP is 60 days or more but less than 90 days
c) Within 10 days if tenure of CP is less than 60 days.
The total investment of the bank/DFI in CPs shall not exceed twice the equity of the bank/DFI. The banks/DFIs shall ensure compliance with all the limits prescribed herewith and Prudential Regulations.
The banks/DFIs wishing to invest in CP’s shall obtain one time prior approval from State Bank for commencing / undertaking this activity.