7.4.3 Inspection of pledged goods: In cases where a combination of factors (for e.g., new relationship, high value or uncommon commodity, etc.) lead to a higher level of risk, borrowers may be subjected to additional procedures. These may include requirement of independent laboratory reports of goods coming under pledge to ascertain the condition and value of stocks. In case of liquids, gases, etc., pledged in bulk storage, where it is not possible to separate the pledged goods of respective lenders, joint inspections are to be undertaken and stock verification. Even in case of commonly pledged commodities like phutti, paddy in sacks (boras), and cotton bales, etc., the respective units of storage (boras, bales, etc.) may be weighed on a test basis to verify overall quantities. Prompt action should be undertaken to address any concerns communicated by the Banks muccaddum. 7.4.4 Joint Inspection of Goods under Pledge with Other Banks In cases where more than one lender provides credit facilities against a pledge of goods that are similar in nature, there may be a risk that multiple pledges are created against the same stocks. To minimise this risk, it is important that joint inspections of pledged goods be undertaken, at least once every calendar year, alongside the other lenders. Where this is not possible due to whatever reason, the RM should report this in a memo to the concerned SCO. 7.4.5 Correlation between Exposure and Collateral Types & Values Where the credit quality of the obligor and the value of the collateral have a material positive correlation, a collateral provide little protection as compared to a collateral with low correlation with obligors credit quality. For example, a collateral of mortgage over commercial property in DHA Lahore provided by a textile manufacturer in Faisalabad has little correlation with the credit quality of the obligor and hence it is preferred than a charge over current assets of the obligor, where the correlation between exposure and collateral value is relatively higher. In cases where existing exposures are secured with collateral having high positive correlation with the credit quality of the obligor, steps should be taken, over time, to secure the facilities with more meaningful collateral. Going forward, the Bank will develop a sophisticated methodology for determining the correlation between exposure and collateral type in line with requirements of IRB approach of the Basel II framework. However, until such time, the business personnel should ensure that adequate care is taken in allowing credit facilities against collateral that is materially correlated.