The State Bank of Pakistan (SBP) has revised the limits for borrowers of microfinance banks (MFB) aimed at promoting access to finance for low-cost housing and microenterprises.
The banking regulator claimed that the revised regulations are expected to bring down the cost of serving borrowers from lower-income groups to draw finance for low-cost housing and micro & small enterprises (MSE). Thus, the revised prudential regulations will address traditionally unmet demand for finance in MSE and housing segments, particularly from the marginalized sectors.
Accordingly, the maximum size for general loans has increased up to Rs. 350,000 from 150,000 to a borrower with an annual income (net of business expenses) up to Rs. 1,200,000 instead of the previous level of Rs. 500,000.
MFBs may also extend loans against gold collateral for consumption purposes categorized as domestic needs/emergency loans. However, MFB’s aggregate loan exposure against the security of gold shall not exceed 35 percent of its gross loan portfolio.
MFBs shall prudently manage the maturity mismatches arising out of their housing and other long-term financing portfolios by raising long-term funds for on-lending and vice versa.
The maximum size for housing loans has been increased up to Rs. 3,000,000 from Rs. 500,000 to a single borrower with an annual income (net of business expenses) up to Rs. 1,500,000 instead of the previous level of Rs. 600,000.
Microfinance Banks shall not allow housing finance purely for the purchase of land/plots; rather, such financing would be extended for the purchase of land/plot and construction on it.
The sanctioned financing limit, assessed based on the repayment capacity of the borrower, value of land/plot and cost of construction on it shall be disbursed in tranches.
The amount disbursed for the purchase of the plot must not exceed 90 percent of the market value/cost of land/plot and 50 percent of the financing limit. The remaining amount shall be disbursed for construction there-upon.
MFBs will take a realistic construction schedule from the borrowers before allowing initial disbursement. For construction-only cases, the sanctioned financing shall also be released in tranches commensurate with the stage of construction.
In case of cost overrun, MFBs may entertain the customer for additional finance for completion of a house, keeping in view the Debt Burden Ratio (DBR) and cushion in the overall Loan-to-Value (LTV) ratio.
While assessing income eligibility on individual borrowers (including salaried persons) for housing & general loans, MFBs shall ensure that the total installment of the financing facilities extended by the financial institutions is commensurate with monthly income and repayment capacity of the borrowers, such that total monthly amortization payments of financing facilities should not exceed 50 percent of the net disposable income of the prospective borrowers. 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.
Microfinance Banks’ Loan Portfolio
It is pertinent to mention here that MFBs play an instrumental role in providing financial services to the low-income strata, particularly MSE and low-cost housing segments. According to statistics, at the close of CY2021, MFBs had over 4.6 million borrowers with outstanding loan portfolios exceeding Rs. 290 billion. This included over 674,000 MSEs and 75,000 housing finance beneficiaries with loans aggregating to Rs77 billion and Rs20 billion, respectively. This underscores the potential of MFBs to serve the financial needs of underserved sectors, especially in rural and remote areas.
The fresh changes made in the prudential regulations include additional guidance for property assessment, mortgage creation and risk management to ensure prudent housing and microenterprise financing. Additionally, separate requirements for classification/provisioning and charging-off non-performing loans have been prescribed for each loan category. Definitions of important terminologies have also been provided to bring clarity and more effective compliance.
The revisions made in the prudential regulations are expected to play a crucial role in enabling MFBs to reach out to the low-income segments of the economy that generally remain financially underserved.