THE State Bank and the country’s banks have moved fast to pre-empt rising calls for a moratorium on debt repayments from individuals and businesses. The key now lies in how many parties step forward to avail themselves of the benefits being offered. Chief among these benefits is the option to delay all repayment on principal by one year, for individuals and businesses, but continue the interest payments. Given that Rs4.7tr worth of principal is due over the next year, this is by far the biggest plank in the debt relief plan chalked out by the State Bank and the Pakistan Banks Association. Coupled with the coming reduction in domestic interest rates that will be reflected in the Karachi Interbank Offered Rate, or Kibor, by the end of March, this could amount to significant relief for local enterprises. There is a high possibility that more will be required in the weeks to come, particularly on the interest rates, but for now the ball has passed to the court of the borrowers, who must now vote on the plan with their actions. If we see a large uptake on the terms being offered, we will know it has been successful. If very few step forward we will know there is a problem.

Banks might need more specific guidance on how to treat those parties who seek to avail the terms being offered. If a request to defer principal payments by one year is treated by the banks as ‘rescheduling’, and thereby adversely impacts a borrower’s credit rating, it will serve as a disincentive to step forward. For the success of the scheme — which must be measured in the number of parties availing its benefits — it is important that those participating in it not be left with an adverse report on their credit rating. Businesses are facing a unique challenge with the lockdowns and certainly have a valid case for getting relief. The extent to which this relief does not become a burden on state finances is important since those funds will be required to underwrite social protection as well as significant investments in healthcare provision. Giving debt relief in the form of deferred repayment of the principal has the benefit of not placing any burden on government finances to provide relief to industry. This is the way forward should further measures be required to support industry, which must not be allowed to become a burden on the state.

Published in Dawn, March 28th, 2020

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