SBP opens bank lending to small firms and farmers through agents

KARACHI: The State Bank of Pakistan has issued a financing framework that allows banks to lend to small enterprises and small farmers through wholesale and agency arrangements, using microfinance banks and non-bank lenders to reach borrowers the formal banking system has largely bypassed.

The framework, reported by Business Recorder, works through participating financial institutions, the banks, and agent financial institutions, defined as microfinance banks (MFBs), non-banking microfinance companies (NBMFCs) and non-bank finance companies (NBFCs). Loans channelled this way remain part of the bank's portfolio against small enterprises and small farmers and are covered under the federal government's Risk Coverage Schemes for SMEs and Small Farmers.

Agent institutions will handle loan origination, appraisal, approval, monitoring, recovery and reporting, while the loan may be booked either on the agent's books or directly on the bank's, according to the framework. In both cases the exposure must be identifiable and traceable and reported to the bank through API-based integration.

Per-borrower ceilings are set at Rs1 million for NBMFCs and Rs5 million for NBFCs and MFBs in small enterprise lending. For agricultural borrowers the limits are Rs500,000 for NBMFCs and Rs2 million for NBFCs and MFBs. The ceilings apply to individual borrower exposure and remain subject to each institution's financing capacity and its underwriting and monitoring capability.

Banks will select agents against fixed eligibility criteria: 100 percent operational self-sufficiency, a non-performing loan ratio of no more than 5 percent in SME and agricultural financing, unqualified audit opinions for the last two years and at least three years of experience in enterprise or agricultural lending. Where loans are booked on an agent's books, it must also meet the minimum capital adequacy and capital requirements of its regulator.

Agents must also show sound governance and risk management, including a functional board, independent internal audit and compliance functions and credit origination, monitoring and reporting systems. Compliance with anti-money laundering and counter-terrorism financing rules under State Bank or Securities and Exchange Commission of Pakistan regulations is mandatory.

Profit by Pakistan Today also reported the framework, carrying no details beyond the central bank's announcement. Business Recorder did not report the volume of lending expected under the arrangement or a start date.