State Bank relaxes regulations

Easing of rules will help enhance bank financing for youth, consumers

Salman Siddiqui July 11, 2020
SBP announced latest changes in regulations after the PM unveiled an incentive package for construction industry. PHOTO: FILE

Pakistan’s central bank has relaxed regulations to enable commercial banks and other financial institutions to offer higher financing to the youth for entrepreneurship, and provide more housing finance and consumer financing.

The prime objective of the softening of regulations is to enhance the financing available with banks and financial institutions to offer more credit to consumers.

The move is aimed at creating employment opportunities and reviving economic activities during the current global health crisis when millions of Pakistanis are feared to lose jobs and businesses are collapsing.

“Government of Pakistan has approved a revision in key features of the Prime Minister’s Kamyab Jawan Youth Entrepreneur Scheme,” the State Bank of Pakistan (SBP) announced on Friday.

The revision has allowed banks to offer financing of up to Rs25 million to the youth compared to the earlier maximum limit of Rs5 million, it has been learnt.

People may acquire subsidised loans in three brackets ie Rs100,000 to Rs1 million at 3% mark-up under tier-1, over Rs1 million and up to Rs10 million at 4% mark-up under tier-2, and over Rs10 million and up to Rs25 million at 5% mark-up under tier-3, the SBP said in a notification.

The government would bear the additional cost of financing as banks would charge the standard rate of Kibor plus 400 basis points on all loans.

Earlier, the federal government allocated Rs100 billion for the scheme. All men and women holding CNIC, aged between 21 and 45 years and with entrepreneurial potential are eligible. For IT and e-commerce-related businesses, the lower age limit will be 18 years, according to the SBP.

Small and medium enterprises (start-ups and existing businesses), as per the definition of the SBP and owned by the youth falling in the mentioned age bracket, are also eligible. For IT/e-commerce-related businesses, at least matriculation or equivalent education would be required, it said.

They may acquire long-term loan for machinery and equipment, working capital loan, running finance and leasing of business on 2, 3 and 4-wheel locally manufactured vehicles. They may acquire loans for up to eight years with maximum grace period of one year. “25% of the loans will go to women borrowers,” the SBP said.

“The Finance Division shall allocate funds in each fiscal year’s budget as per estimates provided by the SBP. Payment will be made on the submission of consolidated claims of all banks by the SBP on a quarterly basis,” it said. The government will bear credit losses (the principal portion only) on the disbursed portfolio of banks up to 50% under tier-1, up to 20% under tier-2 and up to 10% under tier-3.

People may acquire loan on only personal guarantee under tier-1. However, banks’ own credit policy will apply under tier-2 and tier-3.

Housing finance

The SBP has allowed banks and development finance institutions (DFIs) to “release and use the general provision (general reserves) maintained…against the housing finance portfolio,” according to a notification.

Banks and DFIs used to maintain general reserves, now called general provision, to mitigate the risk of loss of money against financing.

Before the temporary changes introduced in the housing finance regulation, banks and DFIs were to maintain 0.5% general reserves (the percentage of active/performing housing finance portfolio) if the percentage of classified housing finance to total housing finance stands below 5% for each bank, 1% general reserves below 10% housing finance and they were bound to maintain the reserves at 1.5% of the housing finance portfolio stands up to 10% and above, according to the Housing Finance Prudential Regulations updated in April 2017.

The SBP announced the latest change in the regulations following Prime Minister Imran Khan announced an incentive package for the construction industry while chairing the first meeting of the newly established National Coordination Committee on Housing. He announced subsidy of Rs30 billion for construction on five and 10 marla plots. The mark-up on bank financing for houses up to five and 10 marlas would be 5% and 7%, respectively.

The relaxation in housing financing regulations is temporary and will expire on December 31, 2021. “Thereafter the general provision (reserve) against the house financing portfolio will be maintained as per the method prescribed in the Regulation HF-9 of Prudential Regulations for Housing Finance prevailing before (July 10, 2020),” SBP said.

Low-cost housing a flagship project of PTI government. The revival of construction and allied industries are having potential to create job opportunities and boost economic activities even during Covid-19.

Consumer financing

The central bank has made similar amendments in regulations for consumer financing as it did in case of the housing finance on Friday, meaning banks and DFIs can use now their money reserved in relationship to their consumer financing portfolios to offer higher financing to end-consumers.

Similar to the housing finance, this is a temporary amendment which would automatically expire on December 31, 2021 and banks and DFIs will again be bound to maintain the prescribed regulatory reserve levels as they were maintaining on July 9, 2020.

Published in The Express Tribune, July 11th, 2020.

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