Federal government allocates Rs. 30 billion for banks, spread over 4 years, to share any burden of losses due to bad loans
The State Bank of Pakistan on Wednesday announced it was introducing a risk-sharing mechanism to support banks that provide loans to small and medium-sized businesses in a bid to offset the potential losses of a bad loan.
In a statement, the central bank said it was aware that small and medium-sized businesses were finding it difficult to arrange collateral to secure loans from banks under the Refinance Facility to Support Employment and Prevent Layoff of Workers.
“The Ministry of Finance has stepped forward to shoulder risk sharing with banks,” it said. “Accordingly, the federal government has allocated Rs. 30 billion under a credit risk-sharing facility for the banks spread over four years to share the burden of losses due to any bad loans in future,” it added.
Under the risk-sharing arrangement launched by the State Bank, the federal government would bear 40 percent of the loss on the principal portion of disbursed loan portfolio of banks. “This facility will incentivize banks to extend loans to collateral deficient SMEs and small corporates with sales turnover of up to Rs. 2 billion to avail financing under SBP refinance scheme,” it said.
Under the SBP’s Refinance Scheme to Support Employment and Prevent Layoff of Workers, businesses that commit to retain staff over the three months of lockdown can avail credit through banks for the salaries of those months at a concessional markup rate.
The central bank said the risk-sharing mechanism was expected to increase banks’ incentive to lend to small businesses under this scheme, and had been developed on the basis of feedback received from relevant stakeholders and in collaboration with the Ministry of Finance.
“Ministry of Finance’s swift approval of the subsidy to provide risk coverage to banks has made it possible for the SBP to launch this credit risk-sharing facility,” it said, adding that the implementation of the scheme would continue to be monitored in the coming days.
The State Bank of Pakistan, last month, launched the Refinance Scheme to encourage businesses to retain their workforce in the face of mounting economic challenges posed by movement restrictions meant to curb the spread of the novel coronavirus. While initially praised, the move has drawn criticism because lending banks were unwilling to disburse loans without collateral, which most small and medium-sized businesses cannot provide.