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Microfinance credit guarantee facility.

KARACHI, May 26, 2009 (Balochistan Times) -- State Bank of Pakistan has designed a Microfinance Credit Guarantee Facility to incentivize the channelling of funds to the microfinance sector. The facility is expected to facilitate banks/DFIs to play a leading role in easing credit constraints of MFBs/ MFls in their efforts to maximize outreach by extending credit facilities to them. It would be administered by SBPs Banking Service Corporation, says communique issued here on Tuesday. Keeping in view the importance of microfinance in a developing country context, State Bank has been encouraging banks / development finance institutions (DFIs) to provide funding to viable microfinance banks (MFBs), to enable them to achieve the outreach targets. It has , however, been observed that apart from few instances, where funds have been provided to few MFBs/ Microfinance Institutions (MFIs), the commercial banks are yet to explore the local currency lending opportunities with MFBs/MFIs. The facility is expected to achieve the following objectives: i) The guarantees are expected to help building links between micro borrowers and formal financial institutions. The familiarization of the bank with the client should eventually lead to the graduation of the borrower. ii) Under the facility, the SBP BSC shall provide Partial Guarantees (pari passu) to cover the principal amount in default or First Loss Default Guarantees to cover the first loss, limited to a certain percentage on the principal amount only, to banks/DFIs to minimize the perceived risk premium by covering part of the losses incurred on funds made available to MFBs/MFIs with the advantage of leveraging the guarantee fund a number of times while keeping the incentive for banks/DFIs to collect the loan. iii) Banks/DFIs will evaluate the prospective recipient MFBs/MFIs according to the well defined due diligence criteria. This way the credit enhancement facility will serve the banks/DFIs to develop their own sense of the risks involved in microfinance. iv) The guarantee will facilitate resolution of regulatory issues that limit unsecured lending by banks/DFIs and would bring the loans to MFBs/MFIs under compliance with banking regulations. The facility will provide Partial Guarantee or First Loss Default Guarantee up to a certain limit prescribed by the SBP to reduce the credit risk to banks/DFIs entering into lending arrangements with financially and socially sustainable MFBs/MFIs with significant potential to maximize the outreach to poor and marginalized segments of the society. The facility will effectively allow risk sharing, as Partial Guarantees or First Loss Default Guarantees will provide incentives to participating banks/DFIs to monitor these loans. The structure of the guarantees will enable MFBs/MFIs to borrow in local currency. It will be initially started with the help of the UK Department of International Development (DFID) grant amount of GBP10 million to be kept as reserve and used for issuing guarantees to microfinance providers who fit the criteria of the facility. The facility is expected to help raise local currency funds from local sources primarily banks and DFIs for eligible MFBs/MFIs. The loans portfolio under the guarantee scheme will be administered banks. (1) Distribution of Tasks and Responsibilities: All tasks relating to processing and appraisal of loan applications, evaluation of business plan, loan appraisal, approval, disbursement, recovery, supervision and monitoring, follow up on problem loans, and legal action in case of default will be performed by the lending institution. The SBP BSC will process the guarantee approval and facilitate issuance of NOC to MFBs for availing financing from lending institutions. (2) Leverage and risk-sharing: The extent of risk coverage under this facility will be either 40% of the loss incurred in case of a Partial Guarantee or 25% of first loss in case of First Loss Default Guarantee, on the principal amount only. With the coverage limited up to 40% or 25% of the expected loss on the principal amount as the case may be the facility will be able to achieve a leverage of up to 4 times. (3) SLR eligibility: The funds channelized under facility to MFBs /MFIs shall be deductable from Demand and Time Liabilities of the banks/DFIs for the purpose of SLR and CRR calculation. SLR incentive under section 3 shall be withdrawn if partial claim is paid under section 7(ii) upon invocation of the guarantee. (4) Interest Rate payable by the borrowing institutions The interest rate charged from borrowing institutions under the guarantee facility shall not exceed 2 (two) per cent over and above the prevailing SBP Policy Discount Rate. (5) Responsibilities of lending institution under the facility i) The lending institution shall provide financing after carrying out proper due diligence of the MFB/MFI, keeping in view the risk profile of the borrower and in light of policy developed, duly approved by its Board of Directors, for providing financing under the MCGF. ii) The lending institution shall closely monitor the borrowers account. iii) The lending institution shall ensure that the guarantee claim in respect of the credit facility and borrower is lodged with the SBP BSC under the facility in the form and manner and within such time as may be specified under the facility in this behalf. Any delay on the part of the lending institution to notify the default within the time period specified shall render the lending institution ineligible for the guarantee claims. iv) The payment of guarantee claim by the SBP BSC to the lending institution shall not in any way affect the right of the lending institution to recover the defaulted amount from the MFB/MFI. The lending institution shall exercise all the necessary precautions and initiate such actions as deem necessary for recovery of the defaulted amount, including such action as may be advised by the SBP BSC. v) The lending institution shall comply with such directions as may be issued by the State Bank or the SBP BSC, from time to time, for effecting or facilitating recoveries in the guaranteed account, or safeguarding interest of the SBP BSC as a guarantor, as the SBP BSC may deem fit and the lending institution shall be bound to comply with such directions. vi) The lending institution shall, in respect of any guaranteed account, exercise the same diligence in recovering the dues, and safeguarding the interest of the facility in all possible manners as it might have exercised in the normal course if no guarantee had been furnished under the facility. vii) The lending institutions shall promptly repay the SBP-BSC amounts received from the SBP-BSC under the guarantee and subsequently recovered from the borrower. (6) Extent of the guarantee: Under the facility, the SBP BSC shall provide guarantee cover of up to 40% (Forty percent) of the amount in default in case of Partial Guarantee or 25% of first loss in case of First Loss Default Guarantee, of the credit facility extended by the lending institution to an eligible borrower institution, subject to a maximum guarantee cover of GBP 2.5 million per borrower. The guarantee cover shall commence from the date of first disbursement to the borrowing institution and shall run through the agreed tenure of the credit facility which shall not exceed five years. (7) Conditions and procedures for calling on guarantee i) The lending institution may invoke the guarantee in respect of eligible credit facility if the following conditions are satisfied: - a) the guarantee in respect of that credit facility is in force; b) the amount due and payable to the lending institution in respect of the credit facility has not been paid and the dues have been classified by the lending institution as Non Performing Loans (NPLs). NPL means a loan classified as a non-performing loan based on the instructions and guidelines issued by the State Bank of Pakistan from time to time c) the loan facility has been recalled and the recovery proceedings have been initiated as per banks policy and loan agreement; d) Provided that the lending institution has performed all its responsibilities as defined in section 5. ii) The SBP BSC shall pay ninety per cent of the claim covered under the guarantee on submission of eligible claim by the lending institution, within thirty days, subject to the claim being otherwise found in order and complete in all respects. The balance ten per cent of the guaranteed amount if not recovered by the lending institution from the borrower, will be paid on conclusion of recovery proceedings and final settlement of the loan On a claim being paid, the SBP BSC shall be discharged from all its liabilities on account of the guarantee in force in respect of the borrower concerned.

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Publication:Balochistan Times (Baluchistan Province, Pakistan)
Date:May 26, 2009
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