SBP issues relief package for households, businesses as COVID-19 cases surge

Move aims to cope with impact of COVID-19 pandemic

KARACHI: Amid growing concerns about the potential economic impact of the COVID-19 pandemic, the State Bank of Pakistan (SBP), in collaboration with Pakistan Banks Association (PBA), has announced a comprehensive relief package.

According to a statement by the central bank on Thursday, the package aims to help relevant stakeholders including households and businesses (microfinance, SMEs, corporates, commercials, retail and agriculture) to manage their finances through this phase of disruption.

Through the package, banks’ overall pool of loanable funds has been increased.

To support the banking sector to supply additional loans to businesses and households, SBP has reduced the Capital Conservation Buffer (CCB) from its existing level of 2.5% to 1.5%. “This will enable banks to lend an additional amount of around Rs800 billion, an amount equivalent to about 10% of their current outstanding loans,” said the statement. “The reduced CCB level will remain applicable till further instructions by SBP.”

In addition to this, the regulatory limit on extension of credit to small and medium enterprises (SMEs) has been permanently increased.

The statement pointed out that SMEs typically bear the brunt of credit supply contractions during periods of heightened risk aversion and economic downturn.

“Therefore, as a tool to incentivise banks to provide additional loans to retail SMEs, the existing regulatory retail limit of Rs125 million per SME has been permanently enhanced to Rs180 million with immediate effect,” it said.

This measure will facilitate banks to provide more loans to SMEs which currently stand at around Rs470 billion, it added. Under the package, borrowing limits for individuals have also been increased for one year.

The capacity to borrow from banks for individuals is limited by their capacity to bear the burden of debt, defined in terms of a percentage of their income and known as a Debt Burden Ratio (DBR).

“SBP has relaxed the DBR for consumer loans from 50% to 60%,” said the statement. This measure will allow about 2.3 million individuals to borrow more from banks in this time of need. Besides, payment of principal on loan obligations will be deferred by banks.

Banks and development finance institutions (DFIs) will defer the payment of principal on loans and advances by one year. “To avail this relaxation, borrowers should submit a written request to the banks before June 30, 2020,” the statement directed. “They will, however, continue to service the mark-up amount as per agreed terms and conditions.”

SBP clarified that deferment of principal will not affect borrower’s credit history and such facilities will also not be reported as restructured/rescheduled in the credit bureau’s data. The total amount of principal coming due over the next year is about Rs4,700 billion.  Regulatory criteria for restructuring/rescheduling of loans have been temporarily relaxed till March 31, 2021.

According to the statement, for borrowers whose financial conditions require relief beyond extension of principal repayment for one year, SBP has relaxed the regulatory criteria for restructuring/rescheduling of loans.

The loans that are re-scheduled/restructured within 180 days from the due date of payment will not be treated as defaults. It added that banks will also not be required to suspend the unrealised mark-up against such loans.

In addition, the timeline for classification of “Trade Bills” has been extended from 180 days to 365 days.

Published in The Express Tribune, March 27^th, 2020.

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