Loans under KPP: Govt to provide credit loss guarantee to wholesale lenders

ISLAMABAD: The government will provide a 100 percent credit loss guarantee to the wholesale lenders such as banks, DFIs, and others for providing subsidised loans under the Kamyab Pakistan Programme (KPP).

This guarantee will help the government lure banks into diverting funds for the much-hyped KPP schemes. The banks will provide funds to the executing agencies, such as selected micro finance institutions (MFIs) to disburse the subsidised loans among the borrowers.

The operational cost for the running of KPP is estimated to be around Rs 273.6 billion for three years including overheads and 10 percent of the project’s cost of Rs 24.874 billion. It included Rs 76 billion for training, Rs 25 billion for skill development, Rs 69 billion for client awareness campaign, Rs 27 billion for research and reporting, Rs 24 billion for digitalisation, and Rs 24 billion for project’s resource requirement.

However, the Ministry of Finance spokesman denied it and said this is not correct. “There is no budget allocation for Hunarmand Pakistan. It is just collaboration with the ongoing skill development projects”, he maintained.

The official said the government will provide 100 percent credit loss guarantee to the wholesale lenders against the financing extended to the Executing Agencies (EAs), initially, at the beginning of the program. However, the guarantee coverage shall be reduced to 50 percent over passage of time as the program matures.

This 100 percent credit loss guarantee by the government, to be notified by the SBP is an implied guarantee, similar to Prime Minister Kamyab Jawan-Youth Entrepreneurship Scheme (PMKJ-YES), and will be entitled to all the benefits associated with the explicit guarantee. The definition of default will trigger after the non-payment in 90 days period.

The federal government will provide the additional subsidy of eight to 10 percent to run the KPP successfully.

For three major schemes, such as Kamyab Karobar, Kamyab Kissan and low-cost housing schemes, the markup subsidies paid out to the wholesale lenders such as banks and DFIs will be hovering around one year as Karachi Inter-Bank Offered Rates (KIBOR) plus 0.50 percent interest rate.

When asked about it from the Ministry of Finance spokesman, he said the decision of how much markup is to be given beyond the KIBOR will be decided after bidding. But yes, it will be the same for all the companies, added the spokesman.

The sources said the government shall provide 10 percent default loss to the Executing Agencies (EAs) for Kamyab Pakistan Micro Loans portfolios booked under the KPP.

The Executing Agencies (EAs) of KPP shall also be able to lend more and reach the lowest income strata under the model as there will be 10 percent portfolio-level guarantee for bearing the cost in case of default by the government for the micro loans/ finance. This is more stringent and controlled framework as compared to other similar schemes and could effectively reduce the fiscal burden on the national exchequer, claimed the official documents prepared by the Ministry of Finance.

The program has been designed to ensure there are minimal claims under the guarantee of the federal government. The payment of credit loss subsidy to the executing agencies and wholesale lenders shall be made up to 10 percent and 100 percent of the disbursed portfolio, respectively, under the program on quarterly basis through the SBP. The loan application form (LAF) to be used by all those participating will contain Kamyab Pakistan logo.

The program will initially be run for seven years which could be extended further. The program, however, will be reviewed after three years for its performance and intended results. The banks will also continue to extend new clean loans (T-1) up to Rs 500,000 per borrower under the existing PMKJ-YES but at zero percent mark-up instead of the existing rate of three percent. The SECP will provide its blanket approval to the SBP to debit the government’s account no. 1 for the payment of additional subsidy and loan loss claims to the EAs.