Realizing the growing acceptability of the Microfinance as an effective tool for poverty alleviation and a viable business proposition, State Bank of Pakistan has formulated a regulatory frame work for establishing Micro Finance Banks. Although there are also a number of other NGO-MFIs in the unregulated sector, that provide micro credit facilities to the poor but the combined outreach of MFBs and NGO-MFIs is around half a million loan clients, that is less than 10% of the potential market of 6.5 to 7.0 million poor households. To tap this huge un-served market, State Bank has issued guidelines for Commercial Banks, with their huge branch network across the country and stable sources of funds, to undertake MF business if wish to.

The guidelines have envisaged four modes through which commercial banks can enter into MF services which include, i) establishment of MF counters in the existing branches, ii) designating stand alone MF branches, either through conversion of existing branches or opening new MF branches, iii) establishing independent MF subsidiary with independent and professional board and management under MFIs Ordinance 2001 and iv) developing linkages with MFBs licensed by SBP and NGOs-MFIs that are not licensed by SBP to extend wholesale funds for onward lending.

The micro finance operations of the commercial banks conducted under Modes I, II & IV, as envisaged in the guidelines shall be subject to the following Prudential Regulations issued under the powers vested in Banking Companies Ordinance 1962, however, the Microfinance operations under Mode-III would be governed by MFIs Ordinance 2001 and Prudential Regulations for Micro Finance Banks.

Part – A: PRs for Micro Finance Operations under Mode I & II

Definitions:

(a) “poor persons” means persons who have meager means of subsistence and whose total income during a year, is less than such minimum limit as may be prescribed by State Bank from time to time

(b) “Microfinance” means the financial services to the poor which does not exceed such amount as prescribed by State Bank from time to time.

(c) “NGO-MFI” means an institution, which extends Micro credit and allied services to the poor through sources other than public savings and deposits.

PR-1. Maximum Loan Size

For micro credit, the maximum limit of a loan to a single borrower is Rs. 100,000. The loan amount should be commensurate with the business requirements and repaying capacity of the borrower. The banks shall formulate a separate and well-defined credit policy covering the target market, product design, appraisal techniques, lending limits, loan pricing, tenor, collateral requirements etc. The loans amounting to more than Rs. 100,000/-, or loans granted to person other than ‘poor person’, shall not be treated as Micro Credit for the purpose of application of SBP Prudential Regulations for commercial banks MF operations.

PR-2. Maximum Exposure of a borrower from banks/ MFBs/FIs/NGO-MFIs

The banks shall ensure that total exposure of its micro-credit client from banks/MFBs/FIs/ NGO-MFIs etc. does not exceed Rs.100,000/- in aggregate. For this purpose, they will obtain a certificate from the clients regarding borrowings from banks/MFBs/FIs/NGO-MFIs.

PR-3. Classification of Loans & Advances and Provisioning Requirements

a) Classification of Loans & Advances

The outstanding principal of the loans and advances, payments against which are overdue for 30 days or more shall be classified as Non- Performing Loans (NPLs). The unrealized interest/profit/mark-up/service charges on NPLs shall be suspended and credited to interest suspense account. Further, the NPLs shall be divided into following categories:

li) Substandard: loans in arrears (payments/installments overdue) for 30 days or more but less than 90 days
ii) Doubtful: loans in arrears (payments/installments overdue) for 90 days or more but less than 180 days
iii) Loss: loans in arrears (payments/installments overdue) for 180 days or more

The banks will maintain a Watch List of all accounts delinquent by 5 – 29 days. However, such accounts shall not be treated as NPL for the purpose of Classification/Provision.

b) Provisioning Requirements

i. General Provision: The banks shall maintain a General Provision equivalent to 1.5% of the net outstanding advances (advances net of specific provisions).

ii. Specific Provisions: Beside general provision, the banks shall make specific provisions against NPLs at the following rates:

• Substandard: 25% of outstanding principal net of cash collaterals
• Doubtful: 50% of outstanding principal net of cash collaterals
• Loss : 100% of outstanding principal net of cash collaterals

Note: The banks shall undertake “Classification and Provisioning” exercise at the end of every month. The banks at their discretion may also apply more stringent classification and provisioning criteria for NPLs.

PR-4. Rescheduling / Restructuring of loans

The banks shall reschedule / restructure the NPLs as per the policy approved by their BOD. The rescheduled/restructured loans shall, however, remain classified, unless serviced regularly for 6 months.

PR-5. Writing-off Non-Performing Loans (NPLs)

All Non-Performing MF Loans (NPLs) shall be written off, one month after the loan is classified as “Loss”. This shall, however, not extinguish the banks’ right of recovery of such written-off loans

PR-6. Pricing of MF Products and Services

The banks shall implement appropriate pricing policies, which ensure access of affordable financial services to the poor as well as operational and financial self-sustainability of its Micro finance operations.

PR-7. Operational Policies

The banks shall formulate operational policies for all areas of MF operations including micro-credit, deposit mobilization, internal audit, human resource, rescheduling/ restructuring, write-off of loans/advances, branch selection criterion and mobile banking function etc. and shall submit these policies, duly approved by its Board of Directors, to State Bank for information within 6 months of commencement of MF operations.

Part – B: PRs for Micro Finance Operations under Mode IV:

PR-8. Personal Guarantees

NGO-MFIs generally have nominee directors on their board which are exempted from furnishing personal guarantees; however, in case of directors other than nominees, banks are free to decide the suitability of obtaining Personal Guarantees which may be linked to credit track record / rating, financial strength, and operating performance of the NGO-MFIs. In case of facilities secured against liquid assets, personal guarantees may not be obtained. This Prudential Regulation, for Microfinance operations, shall supersede Regulation R-2 applicable for SME financing.

PR-9. Securities

All the facilities extended to NGO-MFIs shall be appropriately secured as defined in Prudential Regulations for SME financing and Prudential Regulations for Corporate / commercial banking, whichever is applicable. However, the banks may take exposure on NGO-MFIs against loan receivables at the lending bank’s own discretion. While extending facilities against the security of loan receivables, banks shall obtain monthly statements of receivables from NGO-MFIs.

PR-10. Minimum Conditions for Taking Exposure

1. While considering proposals for any exposure (including renewal, enhancement and rescheduling / restructuring) banks should give due weightage to the credit report relating to NGO-MFI obtained from a Credit Information Bureau (CIB) of State Bank of Pakistan. If Credit Information Bureau (CIB) of State Bank of Pakistan does not have any information on particular NGO-MFI, the credit report may be obtained directly from its creditors. The banks may take exposure on the borrowers having overdue/default in CIB keeping in view their risk management policies and criteria, provided they properly record reasons and justifications in the approval form.

2. Banks shall, as a matter of rule, obtain a copy of financial statements duly audited by a practicing Chartered Accountant, relating to the business of NGO-MFIs irrespective of facility amount. The banks shall do financial analysis and satisfy themselves about the operational self sufficiency and financial self sustainability of the NGO-MFIs. The banks, however, may waive the requirement of obtaining copy of financial statements, when the exposure is secured against liquid assets.

3. Banks shall not approve and / or provide any exposure (including renewal, enhancement and rescheduling / restructuring) until and unless the Loan Application Form (LAF) prescribed by the banks is accompanied by a ‘Borrower’s Basic Fact Sheet’ under the seal and signature of the NGO-MFI, as per approved format of the State Bank of Pakistan. This Prudential Regulation for microfinance operations shall replace Regulation R-8 applicable for SMEs Financing and Regulation R-3 for Corporate / Commercial Financing respectively.

 

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