State Bank cuts margin needs to limit shares fallout

KARACHI: The central bank on Thursday reduced margin call requirements against bank financing to 10 percent from 30 percent to help support capital market following heavy losses in recent days on coronavirus fears.

“Keeping in view the steep decline in share prices, margin call requirement of 30 percent vis-à-vis banks’ financing against listed shares has been significantly reduced to 10 percent,” the State Bank of Pakistan (SBP) said in a statement. “Banks have also been allowed to take exposure on borrowers against the shares of their group companies.” Banks have currently extended loans in excess of Rs100 billion against listed shares.

The SBP with the collaboration of Pakistan Banks Association (PBA) has announced a comprehensive relief package for households and businesses amid growing concerns about the potential economic impact of the covid-19 pandemic. The statement said the package would help relevant stakeholders, including households and businesses (microfinance, SMEs, corporations, and commercial, retail, and agriculture entities) to manage their finances through this temporary phase of disruption. The package highlights include, increase in banks’ overall pool of loanable funds. This is to support the banking sector to supply additional loans to businesses and households, SBP has also cut the Capital Conservation Buffer (CCB) from its existing level of 2.50 percent to 1.50 percent.

“This will enable banks to lend an additional amount of around Rs800 billion, an amount equivalent to about 10 percent of their current outstanding loans,” the statement said. The reduced CCB level would remain applicable till further instructions by the central bank. The regulatory limit on extension of credit to SMEs has been permanently increased. SMEs typically bear the brunt of credit supply contractions during periods of heightened risk aversion and economic downturn.

Therefore, 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 Rs180 million with immediate effect.

This measure would facilitate banks to provide more loans to SMEs, which currently stand at around Rs470 billion. SBP has relaxed the Debt Burden Ratio for consumer loans from 50 percent to 60 percent. This measure would allow about 2.3 million individuals to borrow more from banks in this time of need. Payment of principal on loan obligations would be deferred by banks. “Banks and DFIs will defer the payment of principal on loans and advances by one year. To avail this relaxation, borrowers should submit a written request to the banks before June 30, 2020,” the statement added.

They would, however, continue to service the mark-up amount as per agreed terms and conditions.

It also said that the deferment of principal would not affect the borrower’s credit history, and such facilities would also not be reported as restructured/rescheduled in the credit bureau’s data. The central bank has also temporarily relaxed the regulatory criteria for restructuring/rescheduling of loans till March 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/rescheduling of loans.

The loans that are re-scheduled/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.