SBP moves ahead with debt relief for war-hit districts

Move part of govt’s efforts to stimulate affected areas.

KARACHI: The State Bank of Pakistan (SBP) has announced procedures for writing off debts of borrowers in the Malakand, Swat, Buner and Chitral districts, as part of the government’s efforts to stimulate areas of the country affected by the Taliban insurgency.

According to a circular issued on Wednesday, banks, microfinance banks (MFBs) and development finance institutions (DFIs) will write off loans outstanding as of December 31, 2009.

Loans booked by companies operating in the above-mentioned areas shall qualify for the scheme, while only the principal amount of outstanding loans – performing and non-performing loans (NPLs) less provisioning – shall be subsidised.

Banks, DFIs and MFBs shall bear the cost of such write-offs, to the extent of amount held into provision against NPLs and interest in suspense account, while the rest of the cost will be paid by the government as subsidy. The Ministry of Finance has released the budgetary allocation for the purpose.

Analysts do not expect this measure to have a significant impact on the financial health of the banking sector.

“Approximately one per cent of the entire loans in the country have been taken by businesses in the mentioned districts, which amounts to around Rs35 billion,” said Hamza Marth, a research analyst at KASB Securities, an investment bank. “As far as capitalisation levels of the bank are concerned, there will be no effect, as loans not yet provisioned for will not affect the equity [a measure of a bank’s financial strength].”

Published in The Express Tribune, February 3^rd, 2011.