MFBs allowed to extend micro-financing

The State Bank of Pakistan, in a major move, has allowed micro-finance banks (MFBs) to avail financing under the credit guarantee scheme that would help micro enterprises to boost their business. The facility was earlier available only to commercial banks and was meant for servicing small and rural enterprises. “The State Bank has extended the scope of the Credit Guarantee Scheme (CGS) by including micro-finance banks as eligible Participating Financial Institutions (PFIs) to enable micro enterprises to benefit from this scheme,” said a circular issued by the SBP. The central bank has kept small enterprises in focus for the last many years, but it seems that results are far from the desired level. Micro-finance banks and micro enterprises were also the target of last many governments but growth in this sector was not enough to have a significant share in economy. The State Bank said now MFBs would be able to extend loans from above Rs150,000 upto Rs500,000 to micro enterprises for a tenor not exceeding five years. Earlier, the facility under the CGS was not limited to the small enterprises located in rural areas. The scheme provides separate definitions of small enterprises and rural enterprises. Small enterprises located in urban areas were also eligible for financing provided they fall within the target market given in the scheme. Also, banks could extend additional loans to a borrower other than guaranteed loans under their normal business operations “The micro-finance banks would find great comfort in taking credit risks as they now enjoy risk coverage of 40pc on their loans to micro enterprises,” said the SBP circular. A banker explained that the risk in loans given under the guarantee scheme to small enterprise will be covered by the central bank up to 40 per cent which means in case of default, 40pc loss would be borne by the SBP. It further said that micro finance banks, which have already obtained prior approval of SBP for undertaking ‘micro enterprise’ lending can apply for allocation of credit exposure limits under the credit guarantee scheme, the circular added. The scheme encourages banks to extend cash flow based lending facilities to its borrower which depicts adequate cash flows and repayment capacity. However, the scheme does not restrict banks to demand collaterals from borrowers” ie the banks can, in their own discretion, solicit collaterals from a fresh borrower and additional collateral from existing collateral deficient borrowers in case they are not satisfied with their cash flows or repayment capacity.