Forex loans: Banks delegated powers of registration

The State Bank of Pakistan (SBP) has delegated the power of registration of foreign currency (FCY) loans to banks aimed at facilitating corporate entities for raising FCY loans from abroad and further improve the business environment in the country. Previously, as per Foreign Exchange Manual (FEM) 2019, it was required to register loans above $ 1 million, with the Exchange Policy Department, whereas loans up to $1 million were handled by the respective banks.

However as per new instructions, the respective banks will register the FCY loans irrespective of the amount. However, banks will have to ensure that FCY loans are in compliance with the relevant laws and regulations in force.

Further, the minimum tenor of FCY loans, raised by corporate entities for working capital needs and by banks for liquidity management purposes, has been reduced to one month.

In order to implement these changes, Chapter 19 of Foreign Exchange Manual has been revised and circulated vide FE Circular No 6 of 2019 dated December 17, 2019.

"It has been decided that all FCY loans will be registered by ADs irrespective of the amount. ADs will be responsible to ensure that FCY loans are in compliance with all the parameters given against each type of FCY loan, in Chapter 19 of FEM 2019," a circular issued by the SBP said.

According to the SBP, prior permission of the central bank will continue to be required for private sector FCY loans mobilized through securitized instruments, issuance of bonds and financing under Islamic arrangements.

Prior approval from the SBP for long-term FCY borrowing by ADs and FCY borrowing by other Financial Institutions, ie, NBFIs, DFIs, PSOs, PSPs, leasing companies, house building finance companies & insurance companies will also be mandatory.

The SBP directed that prior to registration of FYC loan, ADs will also ensure to have independent assessment of each FCY loan proposal/transaction from money laundering/terrorism financing risk and foreign exchange risk perspective, by their compliance or risk management department.

As per fresh directives, ADs shall conduct appropriate due diligence of the proposal including particulars of lender and shall determine the ultimate beneficial ownership, if it is not a Financial Institution. In case, the lending entity is controlled by residents, ADs will ensure that their investment abroad is in compliance with foreign exchange regulations, the circular added.

Further, ADs will also conduct annual focused Internal Audit of FCY Loan Registration function.

In addition, the minimum tenor of loans raised as Sector Borrowings from Abroad (PSBA), for working and Financial Sector Borrowings from Abroad (FSBA) for liquidity management purposes has been reduced to one month.

For reporting these foreign private loans (FPLs) data on Data Acquisition Portal (DAP), all ADs are required to get Loan Registration Number (LRN) of each loan from the Statistics and Data Warehouse Department by 5th of the following month by providing information along with repayment schedule on the formats attached at annexure A.

Accordingly, Chapter 19 of the FEM 2019 has been revised and ADs have been advised to bring the above contents to the notice of all their constituents and ensure meticulous compliance.

The SBP expects that these initiatives will help the corporate entities to meet their business needs and will reduce their turnaround time in raising financing from abroad thus promoting the ease of doing business.

According to the SBP, all other terms, conditions and instructions in the matter will remain unchanged.