State Bank of Pakistan (SBP) has revised the loan size for small and medium-sized entrepreneurs through microfinance banks (MFB) in order to support businesses in various sectors and stimulate the economy toward a speedy recovery.
In order to enable MFBs to serve the financing needs of the low-income segments,
- SBP enhanced the maximum loan sizes; revised the borrowers’ eligibility criteria for various microloans;
- Allowed lending against gold for consumption;
- Enhanced portfolio ceiling for lending against gold up to 50% of the gross loan portfolio.
Enhanced Loans Size for Micro Borrowers
Accordingly, the maximum size for general loans shall be up to Rs. 350,000 from the previous limit of Rs. 1 million to a person with an annual income (net of business expenses) up to Rs. 1.2 million.
The maximum size for housing loans shall be up to Rs. 3 million from the previous limit of Rs. 1 million to a single borrower with an annual income (net of business expenses) of up to Rs. 1.5 million.
Microfinance finance banks have been directed to assess the income eligibility of individual borrowers (including a salaried person) for housing and general loans ensuring that the total installment of the financing facilities extended is commensurate with monthly income and repayment capacity of the borrower.
The total monthly amortization payments of financing facilities should not exceed 50% of the net disposable income of the prospective borrower.
These measures would be in addition to MFBs’ usual evaluations of each proposal concerning the creditworthiness of the borrowers to ensure that their portfolio fulfills the prudential norms, instructions issued by the State Bank of Pakistan, and does not impair the soundness and safety of the MFB itself.
Loans to Microenterprises
The maximum size for microenterprise loans shall be up to Rs. 3 million for a single project or business. The MFBs shall extend the microenterprise loans only in the name of micro-entrepreneurs to ensure traceability and reduce the incidence of multiple borrowing. However, the aggregate exposure against the microenterprise loans in excess of the ceiling prescribed for general loans shall not exceed 40% of MFB’s gross loan portfolio.
Only MFBs that are fully compliant with the Minimum Capital Requirement (MCR) and Capital Adequacy Ratio (CAR) shall be eligible to undertake microenterprise lending.
MFBs interested to extend microenterprise loans exceeding the ceiling prescribed for general loans shall develop related institutional capacity (products, credit risk management, and monitoring system, training, etc.) and submit detailed business plans of microenterprise lending to SBP for approval.
The SBP shall inter-alia evaluate the plan along with operational/financial performance, funding plan, supervisory assessment, and credit rating of the MFB, and accordingly grant permission for launching a pilot program to the applicant MFB.
Moreover, during the pilot phase, MFBs will have to ensure that their aggregate exposure against the microenterprise loans in excess of the ceiling for general loans shall not exceed 20% of the gross loan portfolio. The final approval for undertaking microenterprise lending on full/commercial scale shall be granted subject to satisfactory evaluation of the pilot program.
The enhanced loan size (up to Rs. 1 million and Rs. 3 million respectively) will be allowed to MFBs that have graduated from pilot microenterprise lending programs (up to Rs. 500,000 and Rs. 1,000,000 respectively) to a commercial scale. However, prior to extending microenterprise loans exceeding Rs. 500,000/- and Rs. 1,000,000/- MFBs shall apply for approval. SBP shall grant approval for pilot/commercial launch based on a satisfactory assessment of the capital position and readiness level of the applicant MFB.
Consumption Financing Against the Security of Gold
MFBs may also extend loans against gold collateral for consumption purposes categorized as domestic needs/emergency loans. Moreover, the aggregate loan exposure of MFB against the security of gold shall not exceed 50% of its gross loan portfolio. The above relaxations shall expire after one year from the date of issuance of these instructions. Thereafter, MFBs shall reduce their aggregate loan exposure against the security of gold to 35% within a maximum period of 1 year.
The maximum limits of the borrowers’ aggregate exposure shall not exceed Rs. 350,000/- for general loans, Rs. 3,000,000/- for housing loans, and microenterprise loans. The aggregate exposure of the borrowers who are eligible to avail both general and microenterprise loans shall not exceed Rs. 3,000,000/-.
The MFBs shall develop an internal mechanism to monitor the overall exposure of their borrowers to manage credit risk and minimize the risk of borrowers’ over-indebtedness. The MFBs shall ensure that the total exposure of their clients does not exceed their total repayment capacity as determined under the criteria laid out in the MFBs’ credit policy.
The central bank should come up with a low-interest financing scheme for the borrowers through microfinance banks and set a mechanism to lower down the expenses and high-interest rates of the banks.
Relief Scheme for Microfinance Borrowers
In the prevailing situation of economic slowdown due to the COVID-19 pandemic, the Microfinance banks have been asked to facilitate microfinance borrowers to avail the deferment of principal repayment or rescheduling/restructuring of loans.
Microfinance banks accommodate the requests via the borrower’s authorized email address or call centers equipped with recorded lines for borrowers calling from or contacted by the microfinance bank on their registered numbers.
Further, each NPL category has been extended by 2-months for borrowers who could not avail relief under the scheme. However, this facility shall stand expired on March 31, 2021.
Microfinance Sector in Pakistan
There are over 7.3 million active borrowers of microfinance banks with the gross loan portfolio surging to over Rs. 308 billion so far.
The ten major microfinance banks have been penetrating rural areas in search of borrowers and savers with the coverage areas of nearly 140 districts.
In Pakistan, microfinance banks charge heavy interest rates of up to 35 percent from the borrowers, which are considered high compared with different countries. The main reason for the high-interest rates is increasing operational costs.
A majority of the banks are making staggering growth in profits despite the increasing number of borrowers.