Ministry of Finance, SBP introduce risk-sharing mechanism to support SMEs

• The Federal Government has allocated Rs30 billion under a credit risk-sharing facility for the banks spread over four years to share the burden of losses due to any bad loans in the future.

The Ministry of Finance and State Bank of Pakistan (SBP) on Wednesday, introduce a risk-sharing mechanism to support bank lending to SMEs and small businesses to avail of SBP’s Refinance Facility to Support Employment.

The development comes amid SMEs finding difficulties in arranging 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.

In a statement issued by SBP, the Federal Government has allocated Rs30 billion under a credit risk-sharing facility for the banks spread over four years to share the burden of losses due to any bad loans in the future.

Under this risk-sharing arrangement, the Federal Government will bear a 40 percent first loss on the principal portion of the disbursed loan portfolio of the banks. The central bank said that this facility will incentivize banks to extend loans to collateral deficient SMEs and small corporates with a sales turnover of up to Rs2 billion to avail financing under the SBP refinance scheme.

Under the SBP’s Refinance Scheme to Support Employment and Prevent Layoff of Workers due to the impact of COVID-19, businesses that commit to not lay off workers in the next three months can avail credit through banks for the three months of wages and salaries expenses at a concessional markup rate.

SBP said that this risk-sharing mechanism is expected to increase the banks’ incentive to lend to SMEs and small corporate under this scheme, was developed on the basis of feedback received from relevant stakeholders, and in collaboration between MOF and SBP.

Under this mechanism, security arrangements will be as per executing the agency’s own credit policy after taking into account the factor of this risk-sharing facility. Hence, banks are encouraged to facilitate collateral deficient borrowers. The central bank said that banks will not be asking for additional collaterals over and above 60pc of the principal amount and markup thereon.