KARACHI - The State Bank of Pakistan has decided to further incentivize commercial banks to provide wholesale funds to eligible Microfinance Banks/ Institutions under the Microfinance Credit Guarantee Facility (MCGF). In partial modification of the guidelines for Microfinance Credit Guarantee Facility issued vide BPRD Circular No. 15 dated December 19, 2008, the central bank has made some amendments in microfinance credit guarantee facility as well as simplified its guidelines in order to make the provisions more flexible, said SBP through a circular issued here on Tuesday. According to the amendments, Banks/DFIs now have the option to provide funding to Microfinance Banks/ Institutions with the existing 40 percent Partial (pari-passu) Guarantee to cover the principal amount in default, or 25 percent First Loss Guarantee to cover up to 25 percent of the first loss on the principal amount, under the MCGF. Under the facility, 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. 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. Moreover, SBP said the guarantees are expected to help building links between micro borrowers and formal financial institutions. The familiarisation of the bank with the client should eventually lead to the graduation of the borrower. It must be recalled that keeping in view the importance of microfinance in a developing country context, the State Bank of Pakistan (SBP) has been encouraging the commercial banks to explore the local currency lending opportunities with MFBs/MFIs. As per the eligibility criteria for microfinance providers, MFPs interested in borrowing from banks / DFIs under this facility will have to demonstrate a strong commitment for enhancing its institutional capacity and financial condition to a level, which will ultimately enable it to access funding without any support under this facility. In this regard, MFBs will be required to chalk out a concrete plan for deposit mobilization, deciding a timeline as to when these banks will be able to raise enough deposits required to fund their loan growth. For MFIs/Rural Support Programs (RSPs), it will be required that they work out a plan for their transformation to MFBs, leading them to act as self-sustainable institutions providing all range of financial services to poor. The MFP applying for funding through the facility, shall be assessed on following parameters: (a) Clear Business Strategy / financial projections (for next five years) focusing on sustainable growth. (b) The focus must be exclusively on reaching out to the poor. (c) Satisfactory progress on Financial and Operational performance in last three years. (d) Having a concrete plan / commitment to build their institutional capacity to mobilize commercial funds for sustainable microfinance operations. (e) The organization must demonstrate commitment through its management decisions to promote initiatives outlined in the existing approved micro-finance strategy to develop the overall sector on sound footing and a minimum of two years experience in providing microfinance service. The aim of Microfinance Credit Guarantee Facility for Microfinance Providers (MFPs) is to help the existing MFPs to become large, innovative, and sound institutions by easing their funding constraints. The funding through the facility shall be used by MFPs for onward lending to poor borrowers. A partner organization may be supported until it has attained the possibility of accessing the desired level of commercial loans. The funding under the facility shall not exceed five years from the date of its first release. 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. 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. The funds channelised 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. 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. According to the responsibilities of lending institution under the facility, 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. The lending institution shall closely monitor the borrowers account. 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. i) 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. ii) 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. iii) 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. iv) The lending institutions shall promptly repay the SBP-BSC amounts received from the SBP-BSC under the guarantee and subsequently recovered from the borrower. 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.