State Bank lets banks lend to small farmers and businesses through microfinance partners
A new wholesale and agency framework sets borrower limits and eligibility tests for the lenders that will originate the loans, with federal risk cover behind them.
The State Bank of Pakistan has issued a framework that lets commercial banks reach small enterprises and small farmers through microfinance banks and other smaller lenders. The central bank said the aim is to improve access to credit under the government's Risk Coverage Facility, which backs lending to these borrowers.
Banks may lend through these arrangements only within eligibility criteria, lending limits and risk management requirements set by the State Bank. Both the bank and its agents must have robust systems and clearly defined responsibilities, so that each knows who answers for a loan at every stage. Agents are expected to use their outreach and lending capacity to find the borrowers.
Who lends and who funds
Under the framework, a bank acts as the participating financial institution and picks partners it calls agent financial institutions. These can be microfinance banks, nonbank microfinance companies and nonbank finance companies. The agent handles origination, appraisal, approval, monitoring, recovery and reporting. Loans can sit on the bank's books or on the agent's, but in both cases they must be identifiable and traceable.
Loans made this way are reported as part of the bank's own portfolio for small enterprises and small farmers, and they are covered by the federal government's Risk Coverage Schemes for SMEs and small farmers.
Limits per borrower
The State Bank has capped how much an agent can lend to any one borrower. Nonbank microfinance companies can lend up to Rs1 million to a small enterprise and Rs500,000 to an agricultural borrower. Nonbank finance companies and microfinance banks can lend up to Rs5 million to a small enterprise and Rs2 million to an agricultural borrower. The limits also depend on each agent's own financing capacity and its ability to underwrite and monitor loans.
Tests for partner lenders
Banks may only choose agents that pass a set of tests. An agent must show 100 percent operational self sufficiency, a nonperforming loan ratio of no more than 5 percent in enterprise and agricultural lending, unqualified audit opinions for the past two years, and at least three years of experience in that kind of lending. Where loans are recorded on the agent's books, it must also meet the capital requirements of its own regulator.
Agents need a functional board, independent internal audit and compliance functions, and working systems for credit origination, monitoring and reporting. Compliance with anti money laundering and counter terrorism financing rules under State Bank or SECP regulations is mandatory.
Agents report their loans to the participating bank through API based integration, so the bank can see each one.
