Jan 3 - 9, 20

Historically, commercial banks have been serving the corporate and large net worth clients. Bulk of the population still borrows from informal channels, extending credit at a prohibitive cost of up to 50 per cent per annum. The government allowed creation of micro finance banks to cater to the needs of unbanked clients. Over the years, the central bank has made changes in the regulatory framework governing these institutions. However, a lot more remains to be done. No one can deny that micro and small enterprises are the backbone of economy. These institutions can help in poverty alleviation, but only when the mark charged is in single digit.

In November 2010, State Bank of Pakistan (SBP) has revised the Minimum Capital Requirement (MCR) for Microfinance Banks (MFBs) and also allowed the existing MFBs to raise their minimum paid-up capital in a phased manner over the next three years. The MFBs will be required to maintain a minimum paid-up capital (free of losses) of not less than Rs300 million if licensed to operate in a specified district instead of Rs100 million fixed earlier; Rs400 million if licensed to operate in a specified region instead of Rs150 million prescribed earlier. Similarly, it will be necessary for a bank to hold MCR at Rs500 million if licensed to operate in a specified province instead of Rs250 million fixed previously.

In addition to these revisions, if a bank is licensed to operate at national level, it will require maintaining MCR of one billion rupees instead of Rs500 million prescribed in past. This step of SBP would ensure that only such sponsors venture to establish MFBs which have adequate financial resources to meet the present and future capital requirements. These banks need enhanced share capital to meet the growing demand for investments in technology intensive infrastructure and information systems.

In May 2010 the SBP had decided to exempt time deposits of one-year tenor and above, held by microfinance banks (MFBs) for maintenance of Cash Reserve Requirement (CRR), and time liabilities of one year tenor and above for maintenance of Statutory Liquidity Requirement (SLR). The central bank made necessary amendments prudential regulations to streamline calculations and reporting of CRR and SLR wherein MFBs shall now maintain CRR equivalent to not less than 5 per cent of its deposits (including demand deposits, and time deposits with tenor of less than one year). Similarly, time deposits with tenor of one year and above will not require any cash reserve and time liabilities with tenor of one year and above of MFBs will also not require any SLR.

The circular said MFBs shall also maintain SLR equivalent to at least 10 per cent of its total demand liabilities, and time liabilities with tenor of less than one year. Furthermore, this exemption will encourage mobilization of long-term deposits by MFBs, and greater utilization of their financing resources towards onward lending.

Liquidity starved microfinance banks and institutions can now raise foreign currency-denominated loans from international donor agencies. The purpose of the loan, which can also come from commercial financial institutions, should only be to finance loan portfolio of microfinance banks and borrowing can be raised in US dollar, euro, pound sterling and Japanese yen. This decision will help microfinance provider access different sources of debt that may offer longer tenor, and in turn reduce their funding risk. Microfinance banks would have to borrow these foreign currency loans for a minimum period of two years and loan pricing will be based on a reference rate such as London Inter-bank Offered Rate (LIBOR).

These initiatives have been taken to support microfinance industry in raising money to lend onwards to high-risk borrowers. Interest rate may be decided on best possible terms and must be competitive compared to other options available locally. In 2009, the central bank introduced Microfinance Credit Guarantee Facility (MCGF), insuring losses up to 40 per cent on behalf of commercial banks that lend to their microfinance counterparts.

While some microfinance banks have been successful in securing financing under the MCGF, the overall industry is still longing for funds. Microfinance banks, which are in their nascent stage, do not have a branch network or the product to raise funds and have been facing difficulty in keeping their businesses afloat.

The government policy was conceived to make microfinance banks commercially sustainable as against support from grants from international donor agencies. As a consequence of that policy, donations from the World Bank and others started to come through special projects like Benazir Income Support Fund. The SBP has stepped up efforts to assist microfinance banks in the wake of growing concerns that commercial banks serve only those customers who have high creditworthiness, depriving large part of the population of banking service.

A World Bank sponsored survey showed that 85 per cent of Pakistanis are either served by informal financial system or are completely excluded. It also said moneylenders in the informal system charge as much as 57 per cent annual interest rate. Illiteracy, fear of paper work and unavailability of collateral are some of reasons, which keep many people away from the financial system, the report said. The prudential regulations for microfinance banks in Pakistan are considered to be very harsh. These banks have to make provisioning of 25 per cent of the principal amount if a loan installment is not recovered within 60 days after becoming due. Even the commercial banks do not operate under such regulations. (SHK)