SBP's relief package for households and businesses.

Byline: Shabbir Kazmi

Amid growing concerns about the potential economic impact of the COVID-19 pandemic, State Bank of Pakistan (SBP) in collaboration with Pakistan Banks Association (PBA) has announced a comprehensive relief package. This package is aimed at facilitating stakeholders including households and businesses (microfinance, SMEs, corporates, commercial, retail, and agriculture) to manage their finances through this temporary phase of disruption.

Key highlights of the package are as follows:

Banks' overall pool of loanable funds has been increased

To support the banking sector to supply additional loans to businesses and households, SBP has reduced the Capital Conservation Buffer (CCB) from its existing level of 2.50% to 1.50%. This will enable banks to lend an additional amount of around Rs800 billion, an amount equivalent to about 10% of their current outstanding loans. The reduced CCB level will remain applicable till further instructions by SBP.

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 incentivize 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 will facilitate banks to provide more loans to SMEs, which currently stand at around Rs470 billion.

Borrowing limits for individuals have been increased for one year

The capacity to borrow from banks for individuals is limited by their capacity to bear the burden of debt, defined in terms of a percentage of their income and known as a Debt Burden Ratio (DBR). SBP has relaxed the DBR for consumer loans from 50 to 60%. This measure will allow about 2.3 million individuals to borrow more from banks in this time of need.

Payment of principal on loan obligations will 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 30th June 2020. They will, however, continue to service the mark-up amount as per agreed terms and conditions. The deferment of principal will not affect borrower's credit history and such facilities will also not be reported as restructured/rescheduled in the credit bureau's data. The total amount of...