KARACHI: The State Bank of Pakistan (SBP) has introduced a temporary refinance scheme to incentivize businesses to not lay off their workers during COVID-19 Pandemic. This scheme is expected to ease cash flow constraints of the employers for timely payment of the wages and salaries to their workers and employees and thereby avoid layoffs in the face of economic challenges posed by the spread of COVID-19.

The borrowers availing this facility will undertake not to lay off their workers/employees at least during three months from the date of first disbursement except in case of any disciplinary action. The financing banks/ DFIs will also obtain this undertaking in writing from the borrower while processing financing request.

With a view to supporting businesses to continue payment of wages and salaries to their workers and employees in the aftermath corona virus (COVID-19) outbreak, State Bank (SBP) has introduced a temporary refinance scheme for businesses titled “Refinance Scheme for Payment of Wages and Salaries to the Workers and Employees of Business Concerns”. The core objective of this facility is to incentivize businesses to not lay off their workers during COVID-19 pandemic and the scheme has been designed to give preference to smaller businesses.

According to SBP, the scheme will be available to all businesses in Pakistan through banks and will cover all types of employees including permanent, contractual, daily wages as well as outsourced workers. The scheme will provide financing for wages and salaries expense for three months from April to June 2020 for those businesses which do not lay off their employees for these three months. The mark-up on the loans under this scheme will be up to 5 percent. Borrowers that are on the active taxpayers list, will be able to get loans at a further reduced mark-up rate of 4 percent. SBP will provide refinance to Participating Financial Institutions (PFIs) at service charges of 1 percent per annum for financing to SME clients, allowing PFIs to charge maximum spread of 4 percent per annum. For financing to corporate and commercial borrowers, SBP will provide refinance to PFIs at service charges of 2 percent per annum, allowing PFIs to charge maximum spread of 3 percent per annum.

The borrowers that are on active taxpayers’ list under the Income Tax Ordinance, 2001 would be eligible for 1 percent per annum and will get financing at 4 percent. The subsidy on their mark-up rate will be deducted from SBP’s rate of refinance/ service charges.

Businesses with a 3 month wage and salary expense of up to Rs. 200 million will be able to avail the full amount (100 percent) of their expense in financing while those with a 3 month wage. Businesses with salary expanses more than Rs. 200 million and less than or equal to Rs. 500 million can get Rs. 200 million or 75 percent of 3 months wage bill, whichever is higher. In addition, salary expense of greater than Rs. 500 million will be able to avail up to 50 or Rs. 375 million of actual 3 months wage bill, whichever is higher.

As per procedure, banks will not charge any loan processing fee, credit limit fee or prepayment penalties for loans under this scheme. A grace period of six months will be allowed to the borrowers while the repayment of the principal amount will be made in two years.

SBP expects that one of the main benefits of the scheme is that employers that retain workers on their payroll will be able to restore or increase production quickly once the situation normalizes. The scheme will ease the liquidity constraints of the businesses and they can use their available financial resources to meet other working capital requirements.

Government Entities, Public Sector Enterprises (PSEs), Autonomous Bodies (ABs) and Financial Institutions (including banks, DFIs, Non-banking finance companies (NBFCs), insurance and takaful companies, securities depository companies and trustees, securities brokers, clearing houses and stock and commodity exchanges, etc., are not eligible to borrow under this Scheme.

PFIs will not take more than 15 working days for credit approval process (from the date of receipt of complete information). Where the request is declined, the PFI will explicitly apprise the reason for rejecting the application to the prospective borrower. Where the request is declined, a copy of the rejection letter to the prospective borrower will also be forwarded for information to the Director Off-Site Supervision and Surveillance Department (OSED) simultaneously.

As per procedure, the PFIs will make sure that all applications for these loans are appropriately recorded, including applications that are declined, at a centralized system in the bank. The PFIs shall ensure that information and records of applications under the Scheme, including records of applications that are declined along-with reasons of decline, are readily available.

SBP has asked banks to provide weekly reporting on the take-up of the scheme and in particular the reasons for any denials of financing requests under this scheme.

It may be mentioned here that SBP has taken a number of other measures in recent weeks to mitigate the impact of covid19 on Pakistan’s economy including an extension in repayment of loan principal amounts by one year, concessional financing for hospitals to procure equipment to combat covid19 as well as other measures.

SBP said that it is closely monitoring the credit conditions faced by the businesses and households and will take every possible measure to perform its due role throughout this disruption phase.