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Government introduces risk-sharing mechanism for banks

Factfile by Factfile
May 6, 2020
in Economy
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IT IS TO SUPPORT BANK LENDING TO SME’S AND SMALL BUSINESSES TO AVAIL SBP’S REFINANCE FACILITY TO SUPPORT EMPLOYMENT

Government introduces risk-sharing mechanism for banks. The government took cognizance of the SMEs finding difficulties in arranging adequate collateral and banks’ risk averseness in taking exposures. It is about lending under the SBPs Refinance Scheme to Support Employment and Prevent Layoff of Workers. Thus Ministry of Finance has stepped forward to shoulder risk sharing with banks.

ALSO READ: Pepsi Becomes First Major Corporate Victim Of Corona Virus In Pakistan

Funds Allocation

Accordingly, the Federal Government has allocated Rs 30 billion under a credit risk sharing facility for the banks. It is spread over four years to share the burden of losses due to any bad loans in future.

Under this arrangement, Federal Government will bear 40% first loss on principal portion of disbursed loan portfolio of the banks. This facility will incentivize banks to extend loans to collateral deficient SMEs and small corporates. These entities have sales turnover of up to Rs 2 billion to avail financing under SBP refinance scheme.

This is under SBP’s Refinance Scheme to Support Employment and Prevent Layoff of Workers due to the impact of COVID-19. The businesses that commit to not lay off workers in the next three months can avail credit through banks. This is for the three months of wages and salaries expenses at a concessional mark up rate.

The risk-sharing mechanism will increase the banks’ incentive to lend to SMEs and small corporate. This scheme was developed on the basis of feedback received from relevant stakeholders and in collaboration between MOF and SBP.

Overall, Ministry of Finance’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 for which relevant circular has been issued today. SBP will continue to monitor the implementation of the scheme.

Thus, Government introduces risk-sharing mechanism for banks.

Official Website of SBP: http://www.sbp.org.pk/

Tags: BanksMinistry of FinanceSBPSmall BusinessSMEs
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