Risk-sharing facility for salary refinance scheme: Government to share burden of losses of banks

In order to incentivize banks for financing SMEs and small corporate entities under the "SBP Refinance Scheme to Support Employment and Prevent Layoff of Workers", the federal government has introduced a risk-sharing mechanism and allocated Rs30 billion under a credit risk sharing facility for the banks to share the burden of losses due to any bad loans in future.

According to the State Bank, the Ministry of Finance has stepped forward to shoulder risk sharing with banks as the Small and Medium Enterprises (SMEs) were finding difficulties in arranging adequate collateral, and banks were also avoiding taking risk for lending to SMEs under the State Bank of Pakistan (SBP) Refinance Scheme to Support Employment and Prevent Layoff of Workers.

Therefore, the Ministry of Finance and the State Bank have jointly introduced the risk-sharing mechanism to support bank lending to the SMEs and small businesses to avail the SBP's Refinance Facility to Support Employment.

Accordingly, the federal government has also allocated Rs30 billion under the credit risk sharing facility for the banks spread over four years to share the burden of losses due to any bad loans in future. The risk-sharing mechanism is also expected to increase the banks' incentive to lend to SMEs and small corporate entities under salary refinance scheme.

The risk-sharing mechanism was developed on the basis of feedback received from relevant stakeholders and in collaboration between the Ministry of Finance and the SBP. The 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.

Under this risk sharing arrangement, federal government will bear 40 percent first loss on principal portion of disbursed loan portfolio of the banks. Credit loss subsidy claim will be paid by the federal government in case of non-repayments, after being classified as "loss" as per the classification criteria laid down under respective SBP Prudential Regulations.

The financing extended to businesses with a maximum sales turnover of Rs2 billion under SBP refinance scheme to support employment and prevent layoff of workers is eligible for Risk Sharing Facility by the federal government.

However, SBP has mentioned that security arrangements will be as per executing agency's (EAs) own credit policy after taking into account the factor of this risk sharing facility. EAs will develop and implement robust mechanism to ensure that the loans are utilized for intended purpose only.

As per risk sharing scheme procedure, Development Finance Support Department (DFSD), SBP BSC will manage operational aspects of the risk sharing facility. DFSD will submit data under the risk sharing facility on quarterly basis to the Finance Division.

EAs will submit credit loss subsidy claims to DFSD on quarterly basis within 15 working days after the end of each quarter. DFSD after scrutiny of the claims shall submit the same to Finance Division, GoP. FD will release payment against submitted claims within 15 working days. Upon receipt of subsidy from the federal government, SBP BSC Karachi will credit the account of EAs with the subsidy amount.

SBP has asked the banks/DFIs to ensure immediate implementation of 'Risk Sharing Facility for SBP Refinance Scheme to support employment and prevent layoff of workers' and facilitate the eligible businesses to avail financing under this facility. SBP will continue to monitor the implementation of the scheme.

It may be mentioned here that last month SBP has introduced Refinance Scheme to Support Employment and Prevent Layoff of Workers due to the impact of COVID-19, and businesses that commit to not to lay off workers in the next three months can avail credit at a minimum 3 percent markup through banks for the three months of wages and salaries expenses.

During the initial two weeks of the refinance scheme, over 700 companies applied for the financing amounting to Rs65 billion.

Approval of subsidy by the Ministry of Finance to provide risk coverage to banks has made it possible for the SBP to launch this credit risk-sharing facility, and the SBP would continue to monitor the implementation of the scheme.

After learning that the SMEs finding it hard to arrange adequate collateral and banks risk averseness in taking exposures for such lending under the SBPs refinance scheme to support employment and prevent layoff of workers, decided to move fast with regard to risk sharing with banks.

Under the SBP's refinance scheme to support employment and prevent layoff of workers due to the impact of COVID-19, the government has promised to the businesses that would not layoff workers in the next three months availing credit through banks for the three months of wages and salaries' expenses at a concessional mark up rate.