The Presidents/Chief Executives,

All Banks/DFIs

Dear Sirs/Madam,

BENCHMARKING OF CORPORATE LENDING PRODUCTS TO KIBOR

Please refer to BPD Circular No.1 of 21st January 2004, wherein, the banks/DFIs were directed to use Karachi Inter-bank Offered Rate (KIBOR) as a benchmark for determining pricing of all Rupee Corporate/Commercial banking lending. The objective of benchmarking with KIBOR was to encourage transparency and promote consistency in the market-based pricing of loans.

2. It has been observed that some banks are using longer tenor benchmark rates for shorter tenor loans. The most common practice, noticed by the State Bank, is to re-price a 3-month loan by using benchmark of 6-month KIBOR. This practice is not correct. It is, therefore, clarified that:

(a) For fixed rate time loans, the tenor of the benchmark rate should be the same as the tenor of the fixed loan, e.g. if a loan is fixed-rate for 2 or 3 years, then KIBOR tenor of 2 or 3 years should be used. For tenors exceeding 3 years and not covered by KIBOR, banks are advised to use appropriate benchmarks such as secondary market yields on the relevant tenor of Pakistan Investment Bonds.

(b) For floating rate time loans, the tenor of the benchmark rate should be the same as of re-pricing tenor set for the floating rate loan, e.g. if a loan is re-priced every six month, then 6 month is the relevant benchmark, whether the loan is of 1, 2 years or any other term.

3. The banks/DFIs are advised to use the above method in benchmarking their corporate loans meticulously, as any practice other than this will be against the letter and spirit of the subject circular.
4. All other instructions on the subject will, however, remain unchanged.
5. Please acknowledge receipt.