MICROCAPITAL.ORG STORY: State Bank Of Pakistan Amends Prudential Regulations Applicable To Microfinance Banks to Remove ‘Regulatory Bottlenecks’, Cap Microloan Sizes And Reduce The Risk Of Borrower Over-Indebtedness

It was recently reported that the State Bank of Pakistan (SBP) [1] has amended the Prudential Regulations applicable to Microfinance Banks (MFBs). According to a report posted on the website of the Dawn Media Group [2], the amendments are intended to remove ‘regulatory bottlenecks’ which have been brought to the attention of SBP by the microfinance community in Pakistan recently.

Some of the changes introduced by the amendments relate to an increase in the maximum loan size permitted to be disbursed by MFBs. For housing loans, a single borrower with a household annual income of up to 600,000 Pakistan Rupees (PKR) (approximately USD 7,200) will be allowed to borrow up to PKR 500,000 (approximately USD 6,000) from a MFB. For non-housing or general loans, the limit has been relaxed to a maximum of PKR 150,000 (approximately USD 1,800) for a single borrower with an annual household income of PKR 300,000 (approximately USD 3,600), excluding business expenses. The purpose of this change is to encourage and allow microfinance clients to ‘graduate’ to bigger microcredit facilities.

The amended regulations also dictate that MFBs develop internal policies to monitor the overall exposure of their borrowers in order to manage their credit risk and minimise the risk of borrower over-indebtedness, a problem which has been exacerbated by the recent financial crisis. When a microfinance client approaches a MFB, the MFB shall obtain a written declaration from the borrower regarding other loan or credit facilities that have been obtained from other MFBs or MFIs or banks. The MFB is obliged to ensure that the total exposure of its client does not exceed his or her repayment capacity, as determined under the criteria set out in the MFB’s credit policy. The maximum limit for a borrower’s aggregate exposure shall not in any case exceed PKR 150,000 (approximately USD 1,800) for general loans or PKR 500,000 (approximately USD 6,000) for housing loans. Furthermore, before allowing any facility exceeding PKR 50,000 (approximately USD 602), the MFB shall obtain a credit report from SBP’s Credit Information Bureau [3] (or any other applicable credit bureau) in relation to the borrower in question. The MFB shall also ensure that loans equivalent to the maximum limit are extended only to borrowers with an established track record of satisfactory repayment.

Furthermore, loans overdue by 30 days but less than 60 days will be reclassified but will require ‘no specific provision’ as stated in the MFD Circular No.2 of 2009 [4] which contains a summary of these amendments. The purpose of this change is to reduce any additional stress on the MFB’s capital structure and allow them to upscale their services. Loans overdue by 60 days or more but less than 90 days will be classified as ‘sub-standard’ and will require a ‘specific provision of 25 per cent of outstanding principal net of cash collaterals’ according to the MFD Circular.

By Chinq Yee Chong, Research Assistant

Bibliography

[1] State Bank of Pakistan: www.sbp.org.pk/

[2] Dawn Media Group report entitled ‘SBP Amends Prudential Regulations For MFBs’: http://72.249.57.50/wps/wcm/connect/dawn-content-library/dawn/news/business/11-sbp-amends-prudential-regulations-for-mfbs—il–04

[3] State Bank of Pakistan Credit Information Bureau: http://www.sbp.org.pk/ecib/faq.htm

[4] State Bank of Pakistan MFD Circular No.2 of 2009: http://www.sbp.org.pk/mfd/2009/C2.htm