SBP unveils debt relief measures for individuals, businesses

Updated 27 Mar 2020

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Payment of principal on loan obligations will be deferred by lending banks and development finance institutions by one year. 
— Dawn/File
Payment of principal on loan obligations will be deferred by lending banks and development finance institutions by one year. — Dawn/File

KARACHI: The State Bank of Pakistan (SBP) in collaboration with the Pakistan Banks Association (PBA) unveiled a comprehensive package to help households, businesses and other stakeholders in the wake of cornonavirus-driven economic slowdown.

“Amid growing concerns about the potential economic impact of the Covid-19 pandemic, the SBP with the collaboration of the PBA has announced a comprehensive relief package that will help relevant stakeholders including households and businesses (microfinance, small and medium enterprises (SMEs), corporate, commercial, retail, and agriculture) to manage their finances through this temporary phase of disruption,” said the central bank in a statement issued on Thursday.

It said the banking sector’s overall pool of loan-able funds has been increased. Moreover, in order to support the banking sector to supply additional loans to businesses and households, the SBP has reduced the Capital Conservation Buffer (CCB) from its existing level of 2.50 per cent to 1.5pc.

“This will enable banks to lend an additional amount of around Rs800 billion, an amount equivalent to about 10pc of their current outstanding loans,” said the SBP. The reduced CCB level will remain applicable till further instructions.

The regulatory limit on extension of credit to the SMEs has been permanently increased. The SMEs typically bear the brunt of credit supply contractions during periods of heightened risk aversion and economic downturn.

Repayments on principal can be delayed by one year upon request

“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 Rs180m with immediate effect,” said the SBP.

This measure will facilitate banks to provide more loans to SMEs, which currently stand at around Rs470bn.

The central bank also increased individuals’ borrowing limits 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).

“The SBP has relaxed the DBR for consumer loans from 50pc to 60pc,” the statement said while adding that this measure will allow about 2.3m individuals to borrow more from banks in this time of need.

Payment of principal on loan obligations will be deferred by lending banks and development finance institutions by one year.

“To avail this relaxation, borrowers should submit a written request to the banks before June 30. They will, however, continue to service the mark-up amount as per agreed terms and conditions,” said the SBP.

The deferment of principal will not affect borrower’s credit history and such facilities will also not be reported as structured or rescheduled in the credit bureau’s data. The total amount of principal coming due over the next year is about Rs4,700bn.

Regulatory criteria for restructuring and rescheduling of loans have been temporarily relaxed till Mar 31, 2021.

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

The loans that are re-scheduled or restructured within 180 days from the due date of payment will not be treated as defaults. Banks would 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. Margin call requirements against bank financing have been reduced.

Keeping in view the steep decline in share prices, margin call requirement of 30pc vis-à-vis banks’ financing against listed shares has been significantly reduced to 10pc.

Banks have also been allowed to take exposure on borrowers against the shares of their group companies.

“The SBP and PBA expect that the measures [listed] above will help households and businesses in dealing with financial problems arising due to COVID-19,” said the SBP.

The statement further said the central bank will continue to monitor the economic situation and credit conditions faced by households and businesses and stands ready to take measures in coordination with the PBA to steer the economy during this period of temporary disruption.

Published in Dawn, March 27th, 2020