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KARACHI: The State Bank of Pakistan (SBP) enhancing the maximum loan size has allowed Microfinance Banks (MFBs) for lending against gold.

In order to enable MFBs to serve financing needs of the low-income segments, it has been decided to revise the maximum loan sizes, borrowers' eligibility criteria for various micro loans and allow the lending against gold for consumption and enhance the maximum permissible exposure per borrower.

As per revised regulations of maximum loan sizes and borrowers' income eligibility criteria, the maximum size for general loans will be up to Rs 350,000/- to a poor person with annual income (net of business expenses) up to Rs 1,200,000/-.

The maximum size for housing loans will be up to Rs 3,000,000/- to a single borrower with annual income (net of business expenses) up to Rs 1,500,000/-.

While assessing income eligibility on individual borrowers (including salaried person) for housing & general loans, MFBs will ensure that the total installment of the financing facilities extended by the financial institutions is commensurate with monthly income and repayment capacity of the borrower, such that total monthly amortization payments of financing facilities should not exceed 50 percent of the net disposable income of the prospective borrower.

According to the SBP, these measures would be in addition to MFBs' usual evaluations of each proposal concerning credit worthiness of the borrowers, to ensure that their portfolio fulfills the prudential norms, instructions issued by the State Bank of Pakistan and does not impair the soundness and safety of the MFB itself.

The maximum size for microenterprise loans will be up to Rs 3,000,000/- to a single project or business. The MFBs will extend the microenterprise loans only in the name of micro entrepreneurs to ensure traceability and reduce the incidence of multiple borrowing. However, the aggregate exposure against the microenterprise loans in excess of ceiling prescribed for general loans will not exceed 40 percent of the MFB's gross loan portfolio.

Only those MFBs that are fully compliant with Minimum Capital Requirement (MCR) and Capital Adequacy Ratio (CAR) will be eligible to undertake microenterprise lending.

MFBs interested to extend microenterprise loans exceeding ceiling prescribed for general loans will develop related institutional capacity (products, credit risk management and monitoring system, trainings etc.) and submit its detailed business plan of microenterprise lending to SBP for seeking necessary approval for pilot program.

The SBP will be required to inter-alia evaluate the plan along with operational/financial performance, funding plan, supervisory assessment, and credit rating of the MFB, and accordingly grant permission for launching pilot program to the applicant MFB.

Moreover, during the pilot phase MFBs will have to ensure that their aggregate exposure against the microenterprise loans in excess of ceiling prescribed for general loans will not exceed 20 percent of the gross loan portfolio. The final approval for undertaking microenterprise lending on full/commercial scale will be granted subject to satisfactory evaluation of pilot program. The enhanced loan size (up to Rs 1,000,000/- and Rs 3,000,000/- respectively) will be allowed to those MFBs which have graduated from pilot microenterprise lending programs (up to Rs 500,000/- and Rs 1,000,000/- respectively) to commercial scale.

However, prior to extending microenterprise loans exceeding Rs 500,000/- and Rs 1,000,000/- MFBs will apply to this department for approval. SBP will grant approval for pilot/commercial launch based on satisfactory assessment of the capital position and readiness level of the applicant MFB.

As per fresh directives, MFBs may also extend loans against gold collateral for consumption purposes categorized as domestic needs/emergency loan. Moreover, the aggregate loan exposure of a MFB against the security of gold will not exceed 50 percent of its gross loan portfolio. This relaxation will expire after one year. Thereafter, MFBs will reduce their aggregate loan exposure against the security of gold to 35 percent within a maximum period of 1 year.

The maximum limits of the borrowers' aggregate exposure will not exceed Rs 350,000/- for general loans, Rs 3,000,000/- for housing loans, and microenterprise loans. The aggregate exposure of the borrowers who are eligible to avail both general and microenterprise loans must not exceed Rs. 3,000,000/-.

The MFBs has been asked to develop an internal mechanism to monitor the overall exposure of their borrowers to manage credit risk and minimize the risk of borrowers' over indebtedness.

Copyright Business Recorder, 2020

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