KARACHI, Pakistan (Reuters) - Pakistan’s finance ministry will share part of the risk banks face in lending to struggling small businesses, in a bid to protect jobs in the wake of the coronavirus pandemic, the central bank said on Wednesday.
The South Asian nation, which has reported more than 22,000 COVID-19 infections and 526 deaths, is looking to restart commercial activity to limit any rise in unemployment after a nationwide lockdown that has lasted over a month.
“Under this risk sharing arrangement, the Federal Government will bear 40% first loss on (the) principal portion of disbursed loan portfolios of the banks,” the central bank said in a statement.
Last month the central bank itself launched a refinancing scheme aimed at limiting any economic stagnation, with concessionary loans offered to businesses that committed not to lay off workers in the next three months.
The bank said in its statement that the finance ministry recognised the difficulties faced by small and medium enterprises (SMEs) in arranging collateral and the risk-aversion of banks in lending to them.
“This facility will incentivize banks to extend loans to collateral-deficient SMEs and small corporates with sales turnover of up to 2 billion Pakistani rupees ($12.7 million) to avail (themselves of) financing under the central bank refinancing scheme,” the central bank said.
Last month, Pakistan received $1.39 billion from the International Monetary Fund in the form of a Rapid Financing Instrument to tackle balance-of-payment problems related to the pandemic.
The federal government has allocated 30 billion rupees under a credit risk-sharing facility for banks, spread over four years to share the burden of losses related to any future bad loans.
Pakistan’s economy has been badly hit by the pandemic, with the IMF forecasting a 1.5% contraction this financial year.
($1 = 158.1600 Pakistani rupees)
Reporting by Syed Raza Hassan; Editing by Hugh Lawson