Loan obligations: Banks have deferred payment of principal for one year so far

ISLAMABAD: Under the State Bank of Pakistan's (SBP's) temporary regulatory measures, banks have deferred a total of Rs 566 billion of clients' payment of principal on loan obligations for one year so far to maintain banking system soundness and sustain economic activity, says the International Monetary Fund (IMF).

The IMF in its report "Policy Actions Taken by Countries" updated on 2 July 2020 reviewed various steps Pakistan has taken since March to deal with the Covid-19 crisis.

The report stated that SBP has responded to the crisis by cutting the policy rate by a cumulative 625 basis points to 7.0 percent since March 17. The SBP has expanded the scope of existing refinancing facilities and introduced three new ones that aim at: (i) supporting hospitals and medical centers to purchase equipment to detect, contain, and treat Covid-19 (33 hospitals, Rs 5.9 billion, to date) (ii) stimulating investment in new manufacturing plants and machinery, as well as modernization and expansion of existing projects (13 new projects, Rs 8.8 billion, to date); (iii) incentivizing businesses to avoid laying off their workers during the pandemic (1,700 SMEs , Rs 113 billion, to date).

The SBP introduced temporary regulatory measures to maintain banking system soundness and sustain economic activity. These include: (i) reducing the capital conservation buffer by 100 basis points to 1.5 percent; (ii) increasing the regulatory limit on extension of credit to SMEs by 44 percent to Rs 180 million ; (iii) relaxing of the debt burden ratio for consumer loans from 50 percent to 60 percent; (iv) allowing banks to defer clients' payment of principal on loan obligations by one year (with a total of Rs 566 billion being deferred to date); (v) relaxing regulatory criteria for restructured loans for borrowers who require relief beyond the extension of principal repayment for one year; and (vi) suspending bank dividends for the first two quarters of 2020 to shore up capital.

The SBP has introduced further regulatory measures to facilitate the import of Covid-19-related medical equipment and medicine. These include (i) lifting the limit on import advance payments and import on open account, and (ii) allowing banks to approve an Electronic Import Form (EIF) for the import of equipment donated by international donor agencies and foreign governments, the report added.

The report noted that a relief package worth Rs 1.2 trillion was announced by the federal government on March 24, which is now being implemented and will be pursued in fiscal year 2020-21. Key measures include: (i) elimination of import duties on emergency health equipment; (ii) cash transfers to 6.2 million daily wage workers (Rs 75 billion); (iii) cash transfers to more than 12 million low-income families (Rs 150 billion), which has been fully executed; (iv) accelerated tax refunds to the export industry (Rs 100 billion), out of which 65 percent have already been disbursed, and (v) financial support to SMEs and the agriculture sector (Rs 100 billion) in the form of power bill deferment, bank lending, as well as subsidies and tax incentives. The economic package also earmarks resources for an accelerated procurement of wheat (Rs 280 billion, almost fully executed to date), financial support to utility stores (Rs 50 billion), a reduction in regulated fuel prices (with a benefit for end consumers estimated at Rs 70 billion), support for health and food supplies (Rs 15 billion), electricity bill payments relief (Rs 110 billion), an emergency contingency fund (Rs 100 billion), and a transfer to the National Disaster Management Authority (NDMA) for the purchase of Covid-19-related equipment (Rs 25 billion).

The fiscal year 2021 budget also includes further tariff and customs duty reductions on food items, a Rs 70 billion allocation for 'Covid-19 responsive and other natural calamities control programme,' as well as the provision of tax incentives to the construction sector to address the acute employment needs generated by the lockdowns.

Since the onset of the crisis, provincial governments have been also implementing supportive fiscal measures, consisting of cash grants to the low-income households, tax relief and additional health spending (including a salary increase for healthcare workers).

The government of Punjab's measures includes Rs 18 billion tax relief package and Rs 10 billion cash grants programme. The government of Sindh's measures include cash grant and ration distribution programme of Rs 1.5 billion for low-income households. The fiscal year 2020-21 budgets for provincial governments also provide tax relaxations and expenditure allocations to mitigate Covid-19 effects, it added.

Copyright Business Recorder, 2020