Circulars/Notifications - Banking Policy Department  
 BPD Circular No. 1
January 21, 2004 

The Presidents/Country Heads
All Scheduled Banks & DFIs.

Dear Sir,


With a view to encourage transparency, promote consistency in market based pricing and improve management of the market risks undertaken by the banks, it has been decided that after 31-01-2004, the Karachi Interbank Offered Rate (KIBOR) of one, three & six-month tenor, and other longer tenors as made available, shall be used as a benchmark rate for determining pricing of all Rupee Corporate/Commercial banking lending, of banks & DFIs in terms of the Prudential Regulations for Corporate and Commercial Banking. In this regard, following instructions are issued for strict adherence by the banks:-
1. The benchmarking will be applicable to:
• All Floating and Fixed Rate Time Loans / TFCs / Commercial Papers with reset dates (where applicable) within the available KIBOR tenors upto 6 months which is to be increased to 12 months by March 31, 2004 and thereafter to 3 years by December 31, 2004.
• Overdraft and Running Finance obtained / renewed after 31 January 2004.
2. Following methodology will be used for using KIBOR as the benchmark rate:
• KIBOR is defined as the Average rate, Ask Side, for the relevant tenor, as published on Reuters page KIBOR or as published by the Financial Markets Association of Pakistan in case the Reuters page is unavailable.
• Banks and the borrowers are free to decide on the relevant tenor of KIBOR and the spread over KIBOR at their discretion.
• KIBOR will be set for the lending facility on the date of draw-down or on the markup-reset date.
• Offer Letter to the client should clearly indicate the KIBOR’s tenor plus agreed spread, frequency of revision etc.

3. Following Exemptions will be available from the requirement of using KIBOR as benchmark rate:
• Financing under Export Finance Scheme of the State Bank of Pakistan, rates of which shall continue to be determined as per instructions issued by the Banking Policy Department of State Bank of Pakistan.
• Lending provided by the banks in terms of the Prudential Regulations relating to Consumer financing and SME Financing.
• The Overdraft and Running Finance facilities extended upto 31 January 2004. (These shall, however, be benchmarked to KIBOR at the time of renewal of the facility or when the same is due for repricing.)
• All TFCs / CPs approved by SECP and / or submitted to any stock exchange, provided the requests for necessary approval are submitted upto January 31, 2004.
• All time loans with agreements executed upto January 31, 2004. However, if the pricing is renegotiated, these loans will be benchmarked to KIBOR.

The banks are advised to comply with the said instructions and procedure of benchmarking to KIBOR.
All concerned are encouraged to report the instances where the lending facilities are not extended by the banks in the light of foregoing instructions for appropriate regulatory actions by the State Bank.


Yours faithfully,
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