State Bank of Pakistan (SBP), amending Prudential Regulations (R-1), has announced it will revise instructions on "Capital Adequacy Framework for Microfinance Banks" in line with international best practices and Basel Capital Framework.
According to BPRD Circular No 10 of 2015, issued on Wednesday, the capital adequacy instructions for microfinance banks were last updated in the year 2008 and since then significant changes have taken place in the calculation of Capital Adequacy Ratio (CAR) especially with the implementation of Basel III from December 31, 2013 in Pakistan. These developments have necessitated revision in the Capital Adequacy Framework for MFBs.
Under the amendment a floor of 20 percent Risk weight has been introduced for financing against gold. While, an Operational Risk Capital Charge at the rate of 3 percent of average Gross Income has also been introduced. In addition, capital charge against off-balance sheet items has been introduced and benefit of Revaluation Reserve has been enhanced from 50 percent to 100 percent. As per amendment deferred Tax Assets will be deducted from capital in a phased manner at the rate of 25 percent per annum starting from December 31, 2015 with full deduction from December 31, 2018.
According to SBP these instructions will become effective from September 30, 2015. However, MFBs are advised to submit their CAR returns based on the instructions contained in this circular as parallel run for the 2nd quarter ending June 30, 2015. Any MFB that fails to meet regulatory capital requirements within the stipulated period will face imposition of penalties and/ or such restrictions on its business including restrictions on acceptance of deposits and lending as may be deemed fit by SBP. MFB's license may be cancelled, if SBP believes that the bank is not in a position to meet the MCR or CAR requirements.
As per amendment, MFBs are required to comply with two capital standards ie Minimum Capital Requirement (MCR) and Capital Adequacy Ratio (CAR). Under MCR, MFBs will maintain a minimum paid up capital (net of losses) one billion rupees if licensed to operate at national level and five hundred million rupees if licensed to operate in a specified province. While MFBs will be required to maintain four hundred million rupees if licensed to operate in a specified region and three hundred million rupees if licensed to operate in a specified district.
In addition, MCR standard includes fully paid-up common shares, balance in share premium account, reserve for issue of bonus shares and any other type of instrument approved by the SBP. While it will less accumulated losses/ discount allowed on the issuance of shares and negative general reserves. MFBs have been asked to maintain Capital Adequacy Ratio (CAR) equivalent to at least 15 percent of their risk weighted assets. The CAR is calculated by taking the Eligible Regulatory Capital as numerator and the Total Risk Weighted Assets.