Oct 4 - 10, 2010

Lending a strong supporting hand to the SMEs, microfinance and agriculture sectors badly damaged by the flash flood the write-offs of existing loans are under consideration where prospects of recovery are slim.

In this respect, the State Bank has constituted committees to develop a strategy for the settlement of existing loans and provision of fresh credit in the affected areas.

Explaining the remedial steps, Shahid Kardar, Governor State Bank of Pakistan has said that the State Bank generally discourages such interventions as they create market and price distortions, promote mis-allocation of scarce credit resources and have monetary implications. However, keeping in view the special circumstances, decision makers may wish to consider a combination of such activities for a limited period, say two years, for flood affected areas, with the cost to be borne by the federal government.

The central bank in consultation with the federal government and donors is also deliberating on deferral of loan repayment for two years - restructuring/rescheduling of overdue loans and reduced mark up for two years provided the interest differential between mark up charged and Kibor (for banks) or Average Market Rate (for MFBs) is borne by the GOP for the period.

Speaking at a Roundtable Discussion on 'Damage Assessment of Floods and Implications for the Financial Sector' Shahid H. Kardar said that the recent floods - the biggest natural calamity in the country's history - provide an opportunity for the banking industry to increase financial inclusion, diversify its products on sustainable basis and play its due role in rebuilding the national economy.

The floods had caused widespread devastation in 78 districts across Pakistan with huge losses of wealth in the form of crops, livestock, roads, infrastructure, public and private buildings, etc. Moreover, the floods have rendered approximately 20 million homeless and posed serious health risks for the affectees.

The agriculture sector, which accounts for 21 per cent of GDP and 45 per cent of employment, has been particularly hard hit and the direct losses to major crops have been estimated at Rs281 billion by the Ministry of Food & Agriculture. In addition to agriculture, the manufacturing sector which depends on agricultural inputs has also been adversely affected. These developments will lead to adverse economic outcomes, with anemic growth and higher inflation. Pakistan will not be able to address these issues alone and will need external support.

The present scenario does not bode well for the agenda on financial inclusion as a significant proportion of the flood-hit population could be pushed below the poverty line. Moreover, those already excluded will have little access to formal financial services such as savings or insurance mechanisms to re-build their asset base.

The SBP Governor has urged the financial institutions to come forward and play their due role in rebuilding of the affected areas as the State Bank and the government would not be able to do it alone. "The agriculture, microfinance and SME sectors need special support of the banking industry in order to re-start the process of income generation," he stressed.

Different presentations were also made on the occasion entailing initial estimates of the damage caused by floods.

Mansoor Ali, Director Economic Analysis Department of the SBP, talked about post-flood macroeconomic outlook. The GDP growth was expected to range between two percent to three percent in the current 2010-11 fiscal year while inflation is estimated to be 13.5 percent to 14.5 percent. Mansoor said that agriculture sector growth would be significantly weaker than earlier projections, but that the negative impact on the growth of industry and the services sectors would be lower.

Muhammad Ashraf Khan, Executive Director, Development Finance Group of SBP said that according to initial estimates recent floods have caused additional loan losses of Rs42.3 billion for banks out of which Rs28.3 billion is from the agri sector. Estimated loan losses for the microfinance institutions are estimated to be Rs3.09 billion.

Dr. Mushtaq A. Khan, Chief Economic Adviser, State Bank of Pakistan, in his remarks urged the banks to change their mindset and use non-conventional methods to increase outreach. "We need to refocus and develop indigenous methods, if we need to have sustainable rural financing in the affected areas," he added. Syed Mohsin Ahmed, CEO Pakistan Microfinance Network, also made a presentation.

Summarizing the discussion, Yaseen Anwar, SBP Deputy Governor reiterated that this calamity provides us a golden opportunity to start afresh and build a platform to embark on new territory by diversifying products and increasing financial inclusion which will help bring down poverty level in the country.