Question : What is meat by secured and unsecured Exposure ?

"What is meat by secured and unsecured Exposure. Mention facilities that are counted as exposure"


Its another question asked by an examinee, for such questions it is recommended that you should go through prudential regulations (PRs) of State Bank of Pakistan. PRs covers all such topics which are defined by SBP as a guideline provided to the banks and DFIs. 


PRs are available here  http://www.sbp.org.pk/publications/prudential/index.htm

I reproduce hereunder the definition from SME PRs of SBP ,


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 Exposure means financing facilities whether fund based and/or non-fund based and include:
s
i) Any form of financing facility extended or bills purchased/ discounted  except ones drawn against the L/Cs of banks/DFIs rated at least ‘A’ by 3 Standard & Poor, Moody’s,  Fitch-Ibca, Japan Credit Rating Agency
(JCRA) or credit rating agency on the approved panel of State Bank of  Pakistan and duly accepted by such L/C issuing banks/DFIs.
ii) Any financing facility extended or bills purchased/discounted on the  guarantee of the person.
iii) Subscription to or investment in shares, Participation Term Certificates,  Term Finance Certificates or any other Commercial Paper by whatever name called (at book value) issued or guaranteed by the persons.
iv) Credit facilities extended through corporate cards.
v) Any financing obligation undertaken on behalf of the person under a  letter of credit including a stand-by letter of credit, or similar instrument.
vi) Loan repayment financial guarantees issued on behalf of the person.
vii) Any obligations undertaken on behalf of the person under any other
guarantees including underwriting commitments.
viii) Acceptance/endorsements made on account.
ix) Any other liability assumed on behalf of the client to advance funds pursuant to a contractual commitment

Source : http://www.sbp.org.pk/publications/prudential/PRs-SMEs.pdf

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The above definition is a comprehensive one and cover all kinds of exposures, but commonly speaking we can say that exposure means the risk a bank have taken upon a customer.That can be in shape of any banking facility whether funded or non-funded.

Exposure is also considered as the amount of risk after netting off the securities we have against those facilities. For example, if we have provided a loan to a client against a Property having a Forced Sale Value of Rs. 1.000 Million and the amount of loan is 1.500 Million then we have a net exposure of Rs. 0.500 Million because if situation arises or in worst case scenario we can only recover Rs. 1.000 Million by selling that property and the remaining amount of loan is at risk.

So, going back to where we started the second part of the question gives you a hint that you have to write down some facilities as defined in PRs considered as exposure. And the person who had gone through the Prudential Regulations of State Bank of Pakistan can only give the proper answer of this question.

Don't take PRs light, our whole banking depends upon these regulations. Go through them and study them well ! This knowledge would be helpful in exam as well as in practical banking field.

Wish you good luck !