February 2, 2006	Thursday	Muharram 3, 1427

KARACHI, Feb 1: State Bank of Pakistan has taken notice of the banks using longer tenor benchmark rate for shorter tenor loans and advised them to follow the rules.

The SBP issued a circular saying that the most common practice is to re-price a 3-month loan by using benchmark of 6-month Kibor which is not correct.

For fixed rate time loans, the tenor of the benchmark rate should be the same as the tenor of the fixed loan, said the SBP. If a loan is fixed-rate for 2 or 3 years, then Kibor tenor of 2 or 3 years should be used. For tenors exceeding 3 years and not covered by Kibor, banks were advised by the SBP to use appropriate benchmark, such as secondary market yields on the relevant tenor of Pakistan Investment Bank.

For floating time loans, the tenor of the benchmark rate should be the same as of re-pricing tenor for the floating rate loan, said SBP. If a loan is re-priced every six month, the 6-month is the relevant benchmark, whether the loan is of 1 or 2 years or any other term.

Market analysts expressed surprise over the instructions and said that the SBP was trying to intervene into the micro-level banking business.