SBP revises bank investment limits for startups, mutual funds and REITs

The State Bank of Pakistan (SBP) has revised regulations governing equity investments by banks and development finance institutions (DFIs), setting specific limits for investments in startups, mutual funds, real estate investment trusts (REITs) and private equity funds.

The amendments, issued on October 23, revise Regulation R-6 of the Prudential Regulations for Corporate/Commercial Banking.

Under the revised rules, a bank's or DFI's total investment in shares of a single company must not exceed the lower of 5% of its Tier-I capital or 10% of the company's paid-up shares.

What are the investment limits for banks?

The SBP has specified different limits depending on the type of investment. Banks and DFIs can invest up to the lower of 5% of Tier-I capital or PKR 500 million in a single startup. Investments in individual mutual funds, REITs and private equity funds face separate limits based on capital and fund ownership.

For startups, including financial technology (fintech) companies, the investment limit is the lower of 5% of the bank's or DFI's Tier-I capital or PKR 500 million.

For investments in units of a single mutual fund, REIT or private equity fund, the limit is the lower of 5% of Tier-I capital or 20% of the respective fund's units.

Tier-I capital, a measure of a financial institution's core capital strength, will be calculated using its latest preceding half-yearly reviewed or annual audited financial statements.

Banks required to assess investment risks

The revised regulations also require banks and DFIs to maintain an approved policy for equity investment decisions.

The policy must include an internal evaluation process to objectively assess proposed investments.

The assessment must consider the institution's financial standing, total investment portfolio, risk appetite, expected returns, expertise, business strategy and exit strategy, among other factors.

These requirements apply to decisions involving investments covered by the revised regulation.

Strategic investments included in aggregate limits

The amendments also specify that exposure arising from strategic investments and investments in units of all types of mutual funds and private equity funds will count toward the aggregate investment limits under Regulation R-6.

However, investments in units of the National Investment Trust (NIT) will remain excluded from these limits until its privatization.

The changes revise paragraphs 1(A) and 1(B)(iv) of Regulation R-6, following earlier instructions issued through BPRD Circular No. 06 of 2014 and subsequent circular letters in 2021 and 2022.

The SBP said all other instructions governing these investments would remain unchanged.