Govt earmarks Rs30bln for credit risk sharing

ISLAMABAD: The government on Wednesday allocated Rs30 billion to share credit risks of banks with regards to recently-introduced employment support refinancing scheme for small and medium enterprises and small businesses.

“The federal government has allocated Rs30 billion under a credit risk sharing facility for the banks spread over four years to share the burden of losses due to any bad loans in future,” the finance ministry said in a statement. “Under this risk sharing arrangement, federal government will bear 40 percent first loss on principal portion of disbursed loan portfolio of the banks. This facility will incentivize banks to extend loans to collateral deficient SMEs (small and medium enterprise) and small corporates with sales turnover of up to Rs2 billion to avail financing under SBP refinance scheme.” The central bank last month introduced a new refinance scheme for payment of wages and salaries to the workers and employees of business concerns to avoid layoffs due to the impact of COVID-19. Businesses that commit to not lay off workers in the next three months can avail credit through banks for the three months of wages and salaries expenses at a concessional mark-up rate.

Ministry of Finance and State Bank of Pakistan (SBP) jointly introduced risk-sharing mechanism to support bank lending to SMEs and small businesses to avail SBP’s refinance facility to support employment.

“Taking cognizance of the SMEs finding difficulties in arranging adequate collateral and banks’ risk averseness in taking exposures for such lending under the SBPs refinance scheme to support employment and prevent layoff of workers, ministry of finance has stepped forward to shoulder risk sharing with banks,” said the ministry. The risk-sharing mechanism was developed on the basis of feedback received from relevant stakeholders. The finance ministry’s swift approval of the subsidy to provide risk coverage to banks has made it possible for the SBP to launch this credit risk sharing facility. SBP will continue to monitor the implementation of the scheme.

The scheme would provide financing for wages and salaries expenses for three months from April to June 2020 for businesses which do not layoff their employees for the three months. The mark-up on the loans under the scheme would be up to five percent. Borrowers who are on the active taxpayers list would be able to get loans at a further reduced mark-up rate of four percent. The SBP designed the scheme to give preference to smaller businesses. Businesses with a 3 month wage and salary expense of up to Rs200 million will be able to avail the full amount of their expense in financing while those with a 3 month wage and salary expense of greater than Rs500 million will be able to avail up to 50 percent of their expense. Businesses in the middle category will be able to avail up to 75 percent of their 3 months’ salary and wage expense. SBP asked banks not to charge any loan processing, credit limit fee or prepayment penalties for loans under the new scheme. Under the scheme, a grace period of six months would be allowed to the borrowers while the repayment of the principal amount would be made in two years.