Dec 13 - 19, 20

Shahid Kardar, Governor State Bank of Pakistan (SBP) said in September 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 present scenario does not bode well for the SBP agenda on financial inclusion as a significant proportion of the flood-hit population could be pushed below the poverty line. Already excluded will have little access to formal financial services to rebuild their asset base. The SBP wants the financial institutions to come forward and play their due role in rebuilding of the affected areas, as the government would not be able to do it alone.

The SBP has revised the minimum capital requirement for microfinance banks (MFBs) and also allowed the existing players to raise their minimum paid-up capital in a phased manner over the next three years. According to the Circular, the MFBs will 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; Rs400 million if licensed to operate in a specified region instead of Rs150 million. Similarly, it will be necessary for a bank to hold capital at Rs500 million if licensed to operate in a specified province instead of Rs250 million previously. A bank licensed to operate at national level will be required to maintain minimum capital of one billion rupees instead of Rs500 million prescribed in past.

The circular further said that institutions, which do not meet the revised benchmark, are required to enhance their paid-up capital (free of losses) according to the following transitional arrangement: A microfinance bank operating at national level will have to increase its minimum paid-up capital to Rs600 million by end 2011, to Rs800 million by end 2012 and one billion rupees by end 2013.

The SBP has launched Rs10 billion concessional financing schemes for SMEs and agricultural sector, allowing banks and DFIs rescheduling of loans in the flood affected areas. The financing scheme is for one year, with a mark-up of 8 percent per annum, and banks have been instructed to evaluate loan applications in five working days. However, the relief would be only for the borrowers of flood affected areas, identified by the National Disaster Management Authority (NDMA) and, under the relief package, banks may defer loan payment for a maximum one and a half year.

The central bank has issued three different circulars for these relief packages. According to the SBP circulars, banks/DFIs and microfinance banks are encouraged to reschedule/restructure agriculture SME and microfinance loans/advances, as per existing Prudential Regulations (PRs) for Agriculture, SME Financing and MFBs, where the possibility of recovery exists.

For all such rescheduled/restructured loans and advances, MFBs may defer loan provisioning up to December 31, 2011. However, classification of such loans will be made as per criteria laid down in the relevant PRs. The SBP has made it clear that current relaxation is available for loans and advances, which have become non-performing since July 1, 2010 in the affected areas identified by NDMA, and loans/advances classified before this date shall not qualify for this relaxation.

Under the scheme, financing will be provided at affordable/concessional mark-up rates through banks/DFIs. All categories of farmers comprising owners, owner-cum-tenants and tenants of the specified areas will be eligible for agricultural loans under the scheme. However, agricultural credit means only farm credit for meeting the production/working capital requirements, as defined under the Prudential Regulations for Agriculture Financing. Banks are encouraged to arrange, for insurance, the loans provided under the scheme and Mandatory Crop Loan Insurance for five major crops, viz. wheat, rice, cotton, sugarcane, and maize, to avoid risk of losses due to natural calamities.

Tenor of the crop production loans and repayment of the principal amount will be based on the cropping cycle up to a maximum period of one year, while the borrowing limit of farmer will be fixed by the bank, keeping in view credit requirements, cash flows, repayment capacity, risk profile of the borrower, etc. Under the scheme, banks may provide short-term loans to SME borrowers, as defined in Prudential Regulations for SMEs in flood affected districts.

However, banks will follow their lending policies approved by their Board of Directors and SBP rules & regulations. Banks will provide short-term loans for working capital requirements of SMEs for a maximum period of one year. The borrowing limits of SMEs will be fixed by the banks, keeping in view credit requirements, cash flows, repayment capacity, risk profile of the borrower, etc. within the maximum limit prescribed under Prudential Regulations for SMEs. Refinance under the scheme will be provided to the banks at five percent per annum. The banks shall be permitted to charge a maximum spread of three percent from the borrowers; therefore, credit to SMEs/farmers will be available at eight percent.

The high incidence of non-performing loans indicates that local lenders not only lack the expertise but are also not adequately equipped with the infrastructure and systems towards loans repayments for any borrowed amount. Helping the subsistence farmer is even more difficult because of their fairly large number, which requires higher level of automation. One cannot overlook the fact that small farmers' access to institutional credit is still limited. This fact becomes a source of concern since small farmers account for 80 percent of aggregate land holding.

According to Agriculture Census 2000, small farmers are those farmers who have land holding of up to 20 acres or less. The major reason for the poor credit access to small farmers is non-availability of financial infrastructure in rural areas and the poor performance of provincial governments in documentation of land titles. Therefore, there is a dire need to extend the outreach of bank branches to improve access to institutional credit as well as to exploit huge base of small depositors in these areas.