Refinance scheme to prevent layoffs

The State Bank of Pakistan (SBP) announced a temporary refinance scheme (up to 30 June 2020) to support employment and prevent layoff of workers in the aftermath of the Covid-19 outbreak on 10 April 2020 with effectivity from 13 April 2020, the following Monday. The scheme aims to finance wages and salaries for three months (April to June 2020) and would end on 30 June 2020. The benefits of the scheme, as per the SBP, are "employers that retain workers on their payroll will be able to restore or increase production quickly once the situation normalizes. The scheme will ease the liquidity constraints of businesses and they can use their available financial resources to meet other working capital requirements."

The scheme envisages direct payments into accounts of permanent, contractual, daily wagers as well as outsourced employees of existing as well as new borrowers of banks and development finance institutions (DFIs) with government entities, public sector enterprises, autonomous and financial institutions not eligible under the scheme. SBP service charge for banks/DFIs was 2 percent per annum for corporate/commercial borrowers and 1 percent for small and medium enterprise borrowers. Later, the SBP announced it will provide refinance to banks at zero percent. The rate of interest to be charged from borrowers would be 4 percent for filers (later reduced to 3 percent) and 5 percent for non-filers.

Nineteen working days after the announcement of this scheme by the SBP there has yet to be any noticeable progress by way of disbursement by any bank for this purpose. The reason: procedural delays with banks requiring additional documentation as per their own standard operating procedures. Informed sources revealed to Business Recorder that the additional documentation is being requested piecemeal which implies that banks/DFIs have not yet come up with clearly identified documents that they require before disbursing the loans directly into the payroll accounts. In response to this major lacuna in disbursements for SMEs under the scheme the government announced that it would share the risk burden and announced an allocation of 30 billion rupees as a risk sharing facility on 6 May 2020. It is not yet clear whether this would ease banks/DFIs risk perception enabling them to begin disbursements or whether this would further delay the process as they would ensure that they have impeccable documentation to submit to the government in the event that there is a default and thereby be eligible for the risk sharing facility.

There are a total of 700 pending applications with banks/DFIs so far to avail of the scheme and the requested amount is 65 billion rupees. There has already been a delay of one week in the payment of salaries by these 700 companies which should be a source of serious concern to the government as thousands if not hundreds of thousands of families are waiting for their wages to meet their household expenses. Given that we are in the midst of Ramazan when expenses are higher than in other months all procedural bottlenecks in the disbursement of the refinance for salaries loans must be speedily resolved. The refinance scheme for salaries and wages is a laudable effort by the central bank that has been appreciated by all concerned and is fully supported during the ongoing pandemic. However its success, it appears, may require a nudge or persuasive intervention by the central bank to ensure that it becomes effective without any further loss of time.