RIZWAN BHATTI

KARACHI: In order to promote infrastructure financing in Pakistan, the State Bank of Pakistan (SBP) has issued Prudential Regulations for infrastructure project financing.

These regulations have also focused the environmental impact of infrastructure projects and banks/DFIs have been asked to consider environmental externalities in infrastructure projects along with other technical, legal and regulatory aspects. As per the Regulations, banks/DFIs, will also be required to obtain and evaluate detailed due diligence of the proposed project which may include reports from financial, technical, legal, insurance and environment advisors.

According to IH&SMEFD Circular No. 06 of 2016, the SBP recognizing the importance of infrastructure financing in the country, issued Infrastructure Project Financing (IPF) Guidelines in 2005 and later updated in 2010. Now, the SBP is issuing Prudential Regulations for infrastructure project financing aimed to further boost the infrastructure financing in the country.

However, these IPF Prudential Regulations do not supersede other directives and instructions issued by the SBP from time to time in respect of areas not covered here.

According to the SBP, these regulations have been developed on the basis of broad-based internal as well as external stakeholders’ consultations. These PRs for IPF draw strength from financial sector’s experiences and the SBP’s forward looking approach in infrastructure sector.

These Prudential Regulations place emphasis on important features of infrastructure project finance which will facilitate the banks and DFIs to assess the cash flow generating capacity of the projects like the requirement of technical feasibility, comprehensive risk assessment, project insurance, technical monitoring of the project during loan tenure and requirement of supply and off-take agreements.

The SBP hoped that these features of the Regulations will help banks and DFIs to develop expertise for financing of infrastructure projects, essentially by evaluating the intrinsic cash flow generating ability of these projects.

Banks/DFIs are encouraged to prepare their own structured lending schemes for the development of IPF. For this purpose, banks/DFIs may commission their own studies to determine the potential in specific infrastructure projects.

As per regulations, besides conventional infrastructure financing, banks/DFIs are also encouraged to adopt Islamic mode of banking to develop infrastructure products as it is very conducive to infrastructure financing.

In developing Islamic financing products for infrastructure, the banks/DFIs should refer to relevant instructions issued by Islamic Banking Department of SBP. Furthermore, Islamic Banking Institutions may convert conventional IPF terms in context of Islamic banking practices wherever deemed necessary.

The IPF Prudential Regulations do not supersede other directives and instructions issued by SBP from time to time in respect of areas not covered here. The IPF Prudential Regulations cover issues relating to risk management of infrastructure project financing only.

However, the relevant sections covering categories viz. corporate governance, anti money laundering, and operations, as mentioned in Prudential Regulations for Corporate/Commercial Banking shall be applied, wherever applicable.

The SBP has advised banks/DFIs to follow the enclosed Prudential Regulations in letter and spirit and any deviation or non-compliance of the same shall attract punitive action under the relevant provisions of the Banking Companies Ordinance, 1962.